5 Minute Market Update – January 18, 2017

Trust Dale CFGI am happy to present this week’s market commentary from FormulaFolio Investments. The goal is to give our clients and friends a simple way to see everything they need to know about the financial markets on a weekly basis, in 5 minutes or less. After all, investing should be simple, not complicated.

Market Update

Equities: Broad equity markets finished mixed for the week with international equities experiencing the largest gains. S&P 500 sectors finished the week mixed as cyclical sectors generally outperformed defensive sectors.

So far in 2017 technology, consumer discretionary, and healthcare are the strongest performers while telecommunications, energy, and consumer staples are the weakest performers year-to-date.

Commodities: Commodities were positive for the week, though oil prices fell 3.00%. Oil prices increased 45.03% in 2016 and prices seem to have stabilized from the drops experienced in 2014 & 2015. Gold prices increased 2.00%, marking third straight week of gains.

Bonds: The 10-year treasury yield increased slightly from 2.42% to 2.45%, though treasury and aggregate bonds were positive for the week. This is the fourth straight week of gains for bonds.

High yield bonds were positive, but mostly flat as riskier assets were mixed and credit spreads increased marginally.

Most indices are currently positive for 2017, with international stocks leading the way.

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Lesson to be learned: Benjamin Graham once said “The individual investor should act consistently as an investor and not as a speculator.” Nobody can predict the future, but it can be difficult to avoid the urge of speculating about “hot” market topics. Markets often act in ways that are unforeseen which is why it is important to maintain a smart and disciplined investment strategy while avoiding knee-jerk reactions based on daily market noise.

FFI Indicators

FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear).

In a nutshell, we want the RPI to be low on the scale of 1 to 100.  For the US Equity Bull/Bear indicator, we want it to read least 67% bullish.  When those two things occur, our research shows market performance is strongest and least volatile.

The Recession Probability Index (RPI) has a current reading of 25.44, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 100% bullish. This means our models believe there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).

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Weekly Comments & Charts

The S&P 500 ended the week mostly flat and remains well above the support level that was set following the breakout in July last year. The market has rebounded sharply from the lows of 2016 and has reached new all time highs multiple times in recent weeks. With the recent momentum and upward price pressure, it appears that US equity markets are currently in an intermediate-term upward trend. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems the sideways/downward pattern experienced from 2015 through mid-2016 has shifted to a more bullish pattern for now.

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It was a quiet week in the US stock markets as major indices closed mixed, but mostly flat.

Though the excitement of the Dow almost reaching the 20,000 milestone has died down for the moment, Q4 2016 earnings season is off to a strong start. On December 31, total S&P 500 earnings were expected to grow 3.0% year-over-year, but an initial group of upside surprises has boosted the growth estimate to 3.2%. Only 6% of companies in the S&P 500 have reported earnings so far, but of the companies that have reported 70% have beat the average earnings growth estimate. If the index reports earnings growth for Q4 2016, it will mark the first time it has achieved year-over-year growth for two consecutive quarters since Q4 2014 – Q1 2015.

The return of positive earnings growth in the US economy is welcomed news as the forward 12-month price-to-earnings (P/E) ratio for the S&P 500 remains somewhat high. The current forward P/E ratio is 17.0, while the 5-year and 10-year average levels are 15.1 and 14.4. Though there is no exact signal level, an inflated P/E ratio can indicate an overvalued market. To fall back to the average P/E ratios, we would need to see earnings increase, stock prices decrease, or a combination of both. If earnings continue to grow, it could help the recent bull-market continue through 2017 by keeping valuations at a reasonable level.

While market trends and history are useful for study, there’s always more to investing than just the charts and trends.

As investors, we need to stay committed to our long-term financial goals. All the short-term news and market movements can be the most debilitating of all when it comes to making sound investment decisions; especially if we allow them to influence knee-jerk decisions.

More to come soon.  Stay tuned.


Phil Calandra

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Source: Phil Calandara