5 Minute Update – March 21, 2017

I am happy to present this week’s market commentary from 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 international stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive with no discernable difference between cyclical and defensive sectors.

So far in 2017 technology, healthcare, and consumer discretionary 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 increased 0.60%. Investor fear regarding the OPEC production cuts increased recently, resulting in downward pressure in oil prices, but seems to have moderated for now. Gold prices rose 2.42% for the week as gold remains moderately positive for the year.

 Bonds: The 10-year treasury yield fell from 2.58% to 2.50%, resulting in gains for treasury and aggregate bonds.

High yield bonds were positive as credit spreads declined slightly 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: Fred Schwed Jr. once said “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” It can be difficult to avoid the urge of speculating about “hot” stock tips which can allegedly make you rich overnight. The truth, however, is markets often act in ways that are unforeseen. This is why it is important to maintain a smart and disciplined investment strategy while avoiding knee-jerk reactions based on daily market noise.

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 25.44, 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 the week slightly positive and remains well above the support level that was set following the breakout in July last year. Though the index has hit the pause button on the recent rally, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times in recent weeks. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems the sideways/downward pattern experienced from 2015 through mid-2016 has shifted to a more bullish pattern for now.

Broad US markets experienced gains as investors reacted positively to the Federal Reserve’s announcement to raise the federal funds rate by 0.25%.

The week started on a slightly negative note as investors eyed the Fed’s announcement Wednesday afternoon. Though the rate hike was largely anticipated, it was unclear whether the Fed would take a more aggressive stance on future rate hikes or look to continue raising rates at a slower pace. Many investors expected the Fed to become more hawkish when addressing the future of interest rates as recent economic data has been mostly better than expected, but it was reiterated the goal was to raise rates only two more times in 2017. Most major asset classes experienced gains immediately following this announcement.

Equities experienced gains because the immediate increase in interest rates is an indication of a healthy US economy. The labor market continues to improve as illustrated by strong job gains and steady income growth, inflation has increased to the strongest level since 2012, and earnings growth continues to trend in a positive direction.

Bond markets even experienced gains following the rate hike announcement. Traditionally, when rates rise bond prices fall. However, although the fed funds rate was increased, the Fed expects rates to remain relatively low through the foreseeable future, which resulted in broad market interest rates falling after the announcement.

The Federal Open Market Committee will hold its next meeting in early May.

Though US stocks appear to be on track to continue performing strongly for the near future, it is important to include other broad asset classes in your portfolio for more consistent, more stable longer-term results.

While market trends and history are useful for study, there’s always more to investing than just the charts and trends.

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, RFC

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Source: Phil Calandara