5 Minute Market Update – October 3, 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 with small-cap US stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive 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 flat for the week as oil prices rose 1.99%, marking the fourth consecutive week of gains for oil. Oil received additional support this week following an unexpected drop in US inventories, furthering the gains experienced in the aftermath of Hurricanes Harvey and Irma. Gold prices fell 0.98% amid increasing interest rates and a stronger dollar, but remain positive with an 11.72% gain YTD.

Bonds: The 10-year treasury yield increased from 2.26% to 2.33%, resulting in negative performance for treasury and aggregate bonds.

High-yield bonds were positive as riskier asset classes performed well during the week.

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 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 318 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 equity markets climbed higher as investor focus turned toward tax reform, capping the least volatile September in history.

Republican leaders of the US House and Senate released a “unified framework” for tax reform on Wednesday. A statement from the House Committee indicates the framework “serves as a template for the tax-writing committees that will develop legislation through a transparent and inclusive committee process.” The framework does not include a significant level of technical detail, but one of the main proposals is the creation of three individual brackets at 12%, 25% and 35%, with a possibility for a fourth top bracket (simplifying from the current seven tax brackets). The framework also proposes eliminating many itemized deductions while increasing the standard deduction, and reducing the corporate tax rate to 20%.

While there are still many details to be finalized, the continued progress toward tax reform has created further optimism in the US stock markets. The month ended as the least volatile September on record (dating back to 1970 when reliable single-day data became available) as the average range between the S&P 500 Index’s daily highs and lows was only 0.39%. Further illustrating the historically low levels of volatility, the S&P 500 has gone 42 consecutive weeks without a weekly move greater than 2% in either direction. The only longer streaks were in the mid-1960’s and mid-1990’s.

While markets remain healthy, it is important to remember every day is independent of the day before. Long-term market movements are based on forward guidance, not on what happened over the past week/month/year. This is why it is important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results. Individual stocks, sectors, and indices can go from periods of over-performance to under-performance without a moments notice.

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