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.
Equities: Broad equity markets finished the week mixed with international stocks experiencing the largest gains and small-cap US stocks experiencing the largest losses. S&P 500 sectors finished the week mixed though there was no discernable difference in the performance of cyclical sectors and 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 increased 3.23%. Oil prices have reached their highest levels in nearly two years, supported by rising global demand and continuing expectations that OPEC and other producing countries will extend a deal to cut output. Gold prices fell 0.20%, marking the seventh week of losses in the last eight weeks, though gold remains positive with a 10.37% gain YTD.
Bonds: The 10-year treasury yield fell from 2.42% to 2.34%, resulting in positive performance for treasury and aggregate bonds. Yields had been trending up since early September, but subsided through the week as President Trump nominated current Fed Governor Jermoe Powell as the next Federal Reserve Chair. 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 slightly negative as an increase in credit spreads offset lower broad interest rates. However, 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.
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 eighth consecutive week (its longest weekly winning streak since 2006) and remains firmly in the upward trend that began in mid-February 2016. Shorter-term momentum has picked back up in recent weeks as the Index has continued to reach new all-time highs, illustrating there may still be further gains ahead. While volatility and downward pressure had slightly increased in recent months, 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 343 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 markets finished mixed for the second consecutive week as President Trump nominated a new Federal Reserve Chair and the House of Representatives released details on tax reform.
On Thursday, President Trump nominated current Fed Governor Jermoe Powell as the next Federal Reserve Chair. Powell has served on the Fed’s board of governors since 2012 and will replace Janet Yellen, pending approval from the US Senate, in February 2018. While other candidates were in contention for the position, Powell became the favorite in recent weeks and was expected to receive the nomination. Historically, Powell has voted in the majority (lead by Janet Yellen) regarding interest rates, so the change in leadership should not have a significant on the macroeconomic environment as Powell is expected to maintain a consistent approach to monetary policy.
House of Representatives Republicans also unveiled a tax reform bill on Thursday, titled the Tax Cuts and Jobs Act. The bill looks to simplify the tax code by cutting down the number of income tax brackets and slashing itemized deductions, while raising standard deductions for individuals. For businesses, the major modification would be to reduce the maximum federal corporate tax rate to 20% from its current level of 35%. House Speaker Paul Ryan has stated the goal is to have a final bill passed and signed by the end of the year, though there are still many steps to take and there may still be further adjustments to the bill before it is considered final.
Though markets remain in an upward trend, it is important to remember every day is independent of the day before. 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 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.
Source: Phil Calandara