5 Minute Market Update – October 17, 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 mostly positive with international stocks experiencing the largest gains and small-cap US stocks experiencing the only losses. S&P 500 sectors finished the week mixed as defensive sectors generally outperformed cyclical 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 4.38%, mostly recovering the 4.61% loss experienced in the previous week. Oil prices were supported by strong Chinese oil import data along with turmoil in the Middle East, as tensions have been building since the Kurdistan Regional Government voted for independence from Iraq in a recent referendum. Gold prices increased 2.33%, snapping a four-week streak of losses as gold remains positive with a 13.44% gain YTD.

Bonds: The 10-year treasury yield fell from 2.37% to 2.28%, resulting in positive performance for treasury and aggregate bonds.

High-yield bonds were slightly negative as an increase in credit spreads offset lower broad interest rates.

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 how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” –  Robert Kiyosaki. If you save a million dollars by the time you’re 30, but blow it all by age 40, you’ve gained nothing in the long-run. Grow and protect your investment portfolio by carefully diversifying it and sticking to a disciplined investment strategy, and you may find yourself funding many generations to come.

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 24.66, 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 fifth consecutive week 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 has 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 328 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 finished the week mixed as the third quarter’s earnings season kicked off.

Q3 2017 earnings season has officially begun. Only 6% of companies in the S&P 500 have reported actual earnings so far (most of which have been from the financial services sector), but initial results have been positive. While the blended S&P 500 earnings growth rate is only 2.1%, of the companies that have reported Q3 earnings so far, 81% have beat the average earnings estimate and 78% have beat the average sales estimate.

As earnings data remains mostly positive, consumer confidence remains high. Friday’s release of the University of Michigan Consumer Sentiment Survey showed a reading 101.1 – its highest level since January 2004 and rising above 100 for only the second time since 2000. The report showed consumers have become more confident in their current economic situation as well as more optimistic about future expectations. This positive sentiment has resulted in strong retail sales as consumers have an increasing ability and desire to spend money, helping support the broad economy. While stock market valuations remain above their averages (the S&P 500 Forward P/E ratio is currently 17.9 compared to the 10-year average of 14.1), the underlying data points imply the economy remains healthy and stable for now.

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.


Phil Calandra

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Source: Phil Calandara