5 Minute Market Update – October 24, 2017

I am happy to present this week’s market commentary written by our partners at 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 large-cap US stocks experiencing the largest gains and international stocks experiencing the only losses. S&P 500 sectors finished the week mixed as cyclical sectors 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 mostly flat for the week as oil prices gained only 0.04%. Oil prices have recently been supported by lower exports due to tensions in the Kurdistan region of Iraq, but weak US demand has capped gains. Gold prices fell 1.85%, marking the fifth week of losses in the last six weeks, though gold remains positive with an 11.35% gain YTD.

Bonds: The 10-year treasury yield increased from 2.28% to 2.39%, resulting in negative performance for treasury and aggregate bonds. Yields have been trending up since early September as investors have been speculating about the nomination for the next Fed Chair. In a recent interview, President Donald Trump indicated he would likely make a decision before his trip to Asia in early November. The two front-runners as of now are Stanford University economist John Taylor (views on raising interest rates are more aggressive) and Fed Governor Jermoe Powell (views on raising interest rates are more conservative; similar to current Fed Chair Janet Yellen).

High-yield bonds were positive as a decrease in credit spreads offset higher broad interest rates. 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.

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 sixth 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 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 333 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 continued to reach new all-time highs as Congress took an important step in the process of tax reform.

Political developments helped sway the markets in a positive direction as the Senate passed a $4 trillion budget blueprint late Thursday, with a narrow vote of 51 – 49. The budget resolution does include proposed spending cuts and entitlement overhauls, but it is largely seen as a shortcut to reforming the tax code. The measure contains language that would allow a tax reform bill to avoid a Democratic filibuster.

This means a bill could be passed with a simple 51-vote majority in the Senate, a critical piece to getting tax reform done. While Republicans have yet to introduce a concrete tax bill, the continued progress toward tax reform has created further optimism in the US stock markets. Amid the many challenges faced in 2017, President Trump and Senate Majority Leader Mitch McConnell have stated they are still looking to pass a tax plan before the end of the year.

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