5 Minute Market Update – January 31, 2017

Trust Dale CFGMarket Update

Equities: Broad equity markets finished positive for the week with the Dow Jones Industrial Average experiencing the largest gains. S&P 500 sectors finished the week mixed as cyclical sectors generally outperformed defensive sectors.

So far in 2017 materials, technology, and consumer discretionary are the strongest performers while telecommunications, energy, and utilities are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the week, though oil prices increased 1.43%. 2017 is off to a slow start for oil, but prices increased 14.64% in the last two months of 2016 and seem to have stabilized from the extreme drops experienced in 2014 & 2015. Gold prices fell 1.23%, marking the first week of losses since mid-December.

Bonds: The 10-year treasury yield increased slightly from 2.48% to 2.49% as treasury and aggregate bonds finished the week mostly flat.

High yield bonds were positive as riskier assets performed well and credit spreads continued to fall.

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

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Lesson to be learned: Fred Schwed Jr. once said “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” It can be difficult to avoid the urge of speculating about “hot” stock tips which can allegedly make you rich overnight. The truth, however, is markets often act in ways that are unforeseen. This 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 finished the week positive and remains well above the support level that was set following the breakout in July last year. This positive price movement snapped the recent narrow trading range experienced by the S&P 500, in which the Index had closed within a 1.75% range for 31 consecutive trading days. It appears that US equity markets are currently in an intermediate-term upward trend as many indices have reached new all time highs multiple times in recent weeks. 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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US stock markets began the week on a slightly negative note, but quickly regained post-election momentum as the Dow Jones Industrial Average reached 20,000 for the first time on Wednesday.

20,000 is not necessarily predictive, as it is not notably different than levels of 19,999 or 20,001 and is has no fundamental meaning, but it does represent a psychological milestone. Humans tend to be attracted to clean, round numbers because they look nice and have a nice ring to them. So what does a Dow above 20,000 mean for the markets going forward?

Though the Dow reaching 20,000 does not mean markets are guaranteed to keep moving in a positive direction, the recent rally seems to have some support. Rising earnings, stronger economic growth, and improving sentiment have helped US equities regain positive momentum following the volatility of 2015 and much of 2016.

The first estimate of Q4 2016 US GDP came in below expectations as it was reported the economy grew 1.9% on an annualized basis compared to a 2.2% consensus, but this value still exceeds the average of 1.7% over the prior four quarters. Q4 2016 earnings have been strong so far as well, with the blended S&P 500 earnings growth rate at 4.2% compared to an initial estimate of 3% before earnings season started. If these positive economic and fundamental trends continue, it could signal the bull market still has legs, though there is still a large amount of political and global uncertainty to be aware of.

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.

Regards,

Phil Calandra

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Source: Phil Calandara