5 Minute Market Update – November 28, 2017

I am happy to present this week’s market commentary written by 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 positive as international stocks experienced the largest gains. S&P 500 sectors finished the week positive as cyclical generally outperformed defensive sectors.

So far in 2017 technology, healthcare, and materials 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 4.24%. Oil prices hit fresh two-year high levels on Friday as markets tightened due to a partial closure of the Keystone pipeline connecting Canadian oilfields with the United States following a spill. Gold prices fell 0.71%, though gold remains modestly positive with a 11.94% gain YTD.

Bonds: The 10-year treasury yield fell slightly from 2.35% to 2.34%, resulting in marginally positive performance for treasury and aggregate bonds. Yields have been trending up since early September, but have subsided since President Trump nominated current Fed Governor Jermoe Powell as the next Federal Reserve Chair in early November. Powell’s views on raising interest rates are similar to current Fed Chair Janet Yellen – investors expect a slow-and-steady path of rate increases over the coming year with the nomination.

High-yield bonds were positive as credit spreads continued to level-off following the spike higher in recent weeks. If the economy remains strong and healthy, higher-yielding bonds are expected to continue outperforming aggregate bonds as they offer higher interest payments and the risk of default is moderately low.

All indices are currently positive in 2017, with equity markets leading the way while commodities and bonds lag behind.

Lesson to be learned: “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett. Sadly, the same can be said about your portfolio (see global stock markets in 2008). However, by keeping a smart and disciplined investment strategy and maintaining a broadly diversified blend of assets, you can improve your probability of long-term success and minimize the negative impacts that extreme bear markets can have on your financial well-being.

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 19.40, 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 positive for the week, following two consecutive weeks of small losses, as the Index remains firmly in the upward trend that began in mid-February 2016. Shorter-term momentum has continued in recent months as the Index has continued to reach new all-time highs throughout 2017, illustrating there may still be further gains ahead. While volatility and downward pressure had slightly increased, stock markets are still in a historically low risk and volatility environment as there has not been a 5%+ correction for the S&P 500 in 358 trading days – the fourth longest streak in the history of the Index. 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

US stocks were higher during the holiday-shortened week as earnings season wraps up.

Broad US markets traded on lighter volume than normal as markets were closed on Thursday and only open for a partial day on Friday. However, that did not stop stocks from experiencing modest gains as investor confidence remains high and economic data remains mostly positive.

With markets continuing to trend higher, Q3 2017 earnings season is wrapping up as 98% of companies in the S&P 500 have already reported results. Of the companies that have already reported, 74% have beat the average earnings estimate and 66% have beat the average sales estimate. The blended S&P 500 earnings growth rate is now at 6.3% year-over-year, higher than the initial 3.1% estimate in September when earnings season began.

Though markets remain strong, it is important to remember the future is largely independent of the past. Broad US stocks have been experiencing strong gains with minimal volatility and virtually no drawdowns so far in 2017. In this environment, it can be easy to forget there are risks to investing. However, it was still less than two years ago (at the beginning of 2016) when the US stock market experienced the worst start to a year in recorded history. This is why it is still important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results, rather than chasing “hot” short-term returns.

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