5 Minute Market Update – September 18, 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 utilities 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 5.08%. Oil prices experienced strong upward pressure through the week as Hurricane Irma was less devastating than initially anticipated, resulting in higher near-term demand expectations. Gold prices fell 1.92% amid increasing interest rates and a stronger dollar, but remain positive with a 15.23% gain YTD.

Bonds: The 10-year treasury yield increased from 2.06% to 2.20% as recent geopolitical concerns eased, resulting in negative performance for treasury and aggregate bonds.

High-yield bonds were positive as credit spreads fell and riskier asset classes performed well for the week.

Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.

Lesson to be learned: “Remember that the stock market is a manic depressive.” –  Warren Buffett. Sometimes the market is sensible and prices are based on economic and business developments. However, at other times the market can be emotionally unstable, swinging from euphoria to pessimism in an instant. By sticking to a disciplined investment strategy you can minimize the effect that emotions can have on your portfolio, improving your chances for long-term portfolio success.

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 22.06, 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. While shorter-term momentum has slowed in recent months, the Index reached a new all-time high and closed above 2,500 for the first time in history, 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 308 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 reached new highs as concerns surrounding Hurricane Irma dissipated and optimism regarding tax reform took center stage.

The S&P 500 reached 2,500 for the first time as the Index recorded its strongest week since early January. Helping push the Index to new highs, US House Speaker Paul Ryan said an outline on tax reform legislation would be released during the week of September 25. While it is still unclear how detailed the outline will be, many investors are becoming more optimistic regarding the prospects for tax reform by the end of 2017.

As US stocks pushed higher, the S&P 500 is on track to do something it hasn’t done since 1959. If the Index finishes positive for the month of September, it will mark the 11th consecutive month in which there was either an increase in prices or a decrease of less than 0.1% (the only negative month over this time period has been a 0.04% decrease in March). Going back to 1928, the S&P 500 has only seen four such streaks in history. This streak helps exemplify the abnormally low levels of volatility in broad stock markets over the past year.

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