5 Minute Market Update – June 27, 2017

I 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 the week mixed with small-cap US stocks experiencing the largest gains. S&P 500 sectors finished the week mostly negative with no discernable difference between defensive and cyclical sectors.

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

Commodities: Commodities were negative for the fifth consecutive week as oil prices fell 3.87%. Rising production in the United States, Nigeria, and Libya, coupled with faltering demand in Asia, has offset OPEC’s attempt to support prices by cutting output. Gold prices were flat for the week as gold remains moderately positive (+9.25%) for the year.

Bonds: The 10-year treasury yield fell slightly from 2.16% to 2.15%, resulting in mostly flat performance for treasury and aggregate bonds.

High-yield bonds were flat as well, as there was not much movement in the US stock and bond markets over the past week.

Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.

Lesson to be learned: “Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer. It can be easy to spot the moments of “market stupidity” in hindsight, but it is not always so clear at the time they are happening. As investors, we need to be prepared for the unexpected so we do not get caught up in the irrationalities the markets so often display. By sticking to a disciplined investment strategy you can minimize the effect that emotions can have on your portfolio, improving your chances for long-term portfolio success.

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 8.94, 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).

Weekly Comments & Charts

The S&P 500 finished the week marginally positive for the second consecutive week, reaching a new record high on Monday. Though the current rally has slowed slightly in recent months, the Index remains in the upward trend that began in mid-February 2016. Short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times this year, illustrating there may still be further gains ahead. The coming weeks should continue to provide valuable insight about the near-term direction of the S&P 500, but it seems to remain in a bullish pattern for now.

*Chart created at StockCharts.com

Global equity markets finished the week mixed as falling oil prices has raised concern for some investors.

The week started off strong as the S&P 500 and Dow Jones Industrial Average reached new all-time highs on Monday. However, US stock markets gave back most of the gains on Tuesday as oil prices continued to tumble amid supply concerns. Markets finished the week mostly unchanged as oil leveled off on Thursday and Friday. With oil prices already down 20% YTD, what is ahead for oil and how might this impact US stock markets?

Oil prices hit a 10-month low as the OPEC-led production cuts have so far failed to significantly reduce the global supply glut. Though compliance with the OPEC cuts has been surprisingly high, higher production in Nigeria and Libya (countries exempt from the deal) as well as higher production in the US has pushed oil prices significantly lower. US oil production has increased more than 10% in the past year, offsetting the lower levels of OPEC production. As oversupply remains a problem, demand is not expected to accelerate sufficiently to help decrease inventory levels. Many experts see even lower prices ahead for oil in the near-term.

As oil prices remain relatively low, it is still somewhat unclear whether this is good or bad for the US economy overall. Some argue the effect of lower oil prices is positive as it lowers the prices at gas pumps, resulting in more money being spent on other sectors of the economy. Others argue the negative impact on the oil industry offset the minor benefits of lower prices, resulting in fewer jobs and less money being spent in the economy.

In reality, the effects of oil prices on the stock market is debatable. Oil prices have experienced both positive and negative correlations with stocks over time. This is because stock markets do not necessarily respond to oil prices directly, but rather they respond to the underling reason behind oil prices. When lower oil prices are caused by low demand due to a weaker global economy, stock prices would generally be expected to trend down with oil. However, when lower oil prices are caused by oversupply while the global economy remains relatively strong, stock prices would generally be expected to trend up even as oil prices fall (as experienced so far in 2017).

While the economy seems stable at the moment, it is important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results. Individual stocks and indices can go from periods of over-performance to under-performance without a moments notice. It is crucial not to chase returns just because a stock is “hot” at the moment.

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