5 Minute Market Update – May 16, 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 negative with small-cap stocks experiencing the largest losses. S&P 500 sectors finished the week mostly negative with no discernable difference between cyclical and defensive sectors.

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

Commodities: Commodities were positive for the week as oil prices rose 3.50%. Oil prices had fallen sharply in recent weeks on renewed concerns that higher US production would impede OPEC’s attempts to reduce global supply, but prices spiked on Wednesday following a report showing falling US crude oil inventories coupled with greater demand. Gold prices were mostly flat with a 0.07% gain for the week but remain moderately positive for the year.

Bonds: The 10-year treasury yield fell slightly from 2.36% to 2.33%, resulting in positive performance for treasury and aggregate bonds.

High yield bonds were positive as risky assets performed well and credit spreads fell slightly.

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

Lesson to be learned: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong” – George Soros. Many investors make the mistake of focusing solely on the gains in their portfolio, however it is equally as important (if not more so) to make sure your mistakes aren’t big enough to damage your portfolio beyond repair. Nobody can be right 100% of the time, but if you stick to a disciplined investment strategy that has the potential to minimize downside risk you can improve your chances of 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 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).

Weekly Comments & Charts

The S&P 500 finished the week negative but remains well above the support level that was set following the breakout in July last year. Though the current rally has slowed in recent months, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times so far this year. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems to remain in a bullish pattern for now.

Broad stock markets finished negative for week as US indices remain in a narrow trading pattern.

Though US stocks are moderately positive so far in 2017, many indices have stalled out since the beginning of March. Most of the returns this year can be attributed to January and February (approximately 80% of S&P 500, 88% of Dow Jones Industrial Average, and 98% of Russell 2000 (small-cap) returns were in the first two months of the year). There has been a minimal amount of market movement since then. On Monday, the CBOE Volatility Index (VIX) closed at 9.77 – the lowest level since 1993. This illustrates a low amount of market volatility and fear. So what has caused the markets to become so complacent with such a low level of volatility?

In recent months, there has been a plethora of conflicting headlines. On the positive side, it seems the Trump administration is working toward tax reform, the French presidential election went as many investors had hoped, and the US economy is relatively healthy as the labor market remains strong and corporate earnings have been better than expected. However, there are still many uncertainties surrounding the markets including growing tensions between the US and North Korea, the ambiguity still surrounding President Trump and some of his policies and actions, and the near-term path of US interest rates.

So far, the fear of the unknown has been offset by positive news, resulting in a trading deadlock between bears and bulls. But volatility is not expected to remain this low forever. If we continue to move through the near-term risks with no hiccups, volatility may remain subdued for the time being, but there is always the risk of an unfavorable economic report or other unknown event that could inject a higher level of fear and volatility into the markets without a moment’s notice.

Stocks have been performing well since the US presidential election with minimal volatility and virtually no drawdowns, but it is important to remember to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results.

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