5 Minute Market Update – October 9, 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 larger-cap US stocks experiencing the largest gains and international stocks experiencing the only losses. 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 negative for the week as oil prices fell 4.61%, snapping a four-week streak of gains for oil. Oil prices had recently received support following an unexpected drop in US inventories, but last week the US hit a new record for crude oil exports, refueling the concern about continued global oversupply for oil. Gold prices fell 0.77% amid increasing interest rates and a stronger dollar, marking four consecutive weeks of price declines, but remain positive with a 10.86% gain YTD.

Bonds: The 10-year treasury yield increased from 2.33% to 2.37%, resulting in negative performance for treasury and aggregate bonds.

High-yield bonds were mostly flat as a decrease in credit spreads offset higher 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 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 323 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 stock markets continued to reach new highs as investors shrugged-off a negative jobs report.

In a report released on Friday, US payroll employment declined by 33,000 jobs in September. This decline was directly related to Hurricanes Harvey and Irma, and would mark the first reported negative number since September 2010. However, many experts believe this number is likely to be revised up into positive territory next month based on the experience of previous major hurricanes in the US. The negative impact of the hurricanes should be temporary and the labor market may even receive a boost in the coming months due to recovery efforts.

While the employment data appears negative on the surface, there were some positive aspects to the overall report. Average hourly earnings increased 0.5% for the months, growing to a 2.9% increase year-over-year. Growing wages illustrates the labor market may be tightening, resulting in employers paying more to retain current talent. Furthermore, the unemployment rate fell to 4.2%, its lowest level since February 2001, and the labor force participation rate increased from 62.9% to 63.1% as there are fewer discouraged workers in the market.

Though markets remain healthy, it is important to remember every day is independent of the day before. Broad US stocks have been in an upward trend 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