Intra-Month Market Update, April 2018

As we move through what has been a strong (so far) earnings season, broad markets have remained volatile. While the blended Q1 2018 earnings growth rate for the S&P 500 currently stands at 18.3%, its highest level since Q1 2011, the Index remains below its most recent all-time-high reached on January 26. This recent pullback, which officially became a “market correction” after falling 10.16% from the all-time-highs on February 8, has now lasted 88 calendar days (52 trading days).

Though the past three months have proven wearisome, causing angst among many investors, the recent market environment has not been anything out of the ordinary. In the postwar period (since end of 1945), there have been 27 corrections of between 10% and 20%. The average decline for these is 13% and takes an average of four months to recover losses. However, the abruptness of this recent correction, combined with the historically low levels of volatility experienced through all of 2017, has made this pullback feel much more severe than it actually may be.

Even with all of the recent volatility and downward pressure, most indices (including bonds) are down only about 1 – 2% year-to-date; and some indices are even positive.

Despite the recent increase in volatility, longer-term momentum remains mostly intact and factors such as corporate earnings and economic fundamentals remain strong.

As investors, we need to stay committed to our long-term financial goals. Staying focused on our long-term investment objectives and maintaining a disciplined investment strategy can reduce daily market noise and increase the odds of a successful outcome over time.

 

Regards,

FormulaFolio Investments

The post Intra-Month Market Update, April 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

Weekly Market Update – April 23, 2018

Strong earnings push stocks higher despite rising interest rates

Week in Review

Global equity markets were positive for the week as stronger-than-expected earnings reports and solid economic data supported gains. The strong start to Q1 earnings season was a welcome distraction from the recent whirlwind of geopolitical uncertainties, with the six largest US banks reporting growth of 24% compared to the 17% expectation.

While it was a positive week for stocks, gains were kept in check as interest rates climbed higher. After starting the year at 2.46%, the 10-year treasury yield flirted with the psychological 3% level, ending the week at 2.96%. Though a yield above 3% would not be discernibly different than the current 2.96%, there is a psychological aspect that could make investors anxious about seeing these levels.

Since the early 1980s, interest rates have been in a steady downward trend. A clean break above 3% may confirm we are in an official “rising rate” environment for the first time in over three decades, which could reignite fears that rates will continue to rise into the near future. Higher rates are generally a headwind to economic growth as they result in higher costs when borrowing money, and thus lower spending and economic activity. However, it is important to realize interest rates are still historically low on a relative basis despite the recent move higher (the 10-year treasury yield was above 15% when rates peaked in 1981).

As investors, we need to stay committed to our long-term financial goals. Staying focused on our long-term investment objectives and maintaining a disciplined investment strategy can reduce daily market noise and increase the odds of a successful outcome over time.

Chart of the week

The S&P 500 finished the week positive, but continued to trade within the triangle pattern that developed in early February. As illustrated in the chart below, the Index has been consolidating in recent weeks, reaching lower highs and higher lows. Generally, with these triangle patterns, markets continue to consolidate until there is a fresh breakout. If markets breakout above the upper trend line, it can indicate the start of a new bullish trend. However, if markets fall through the lower trend line, it can mark the start of a bearish trend. While shorter-term momentum has been volatile and inconclusive, longer-term momentum remains intact as the Index has held above the lower-bounds of the positive trend that began in early 2016. Due to the continued support near this level, there may be a continuation of the longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.

*Chart created at StockCharts.com

Market Update

Equities

Broad equity markets finished the week positive as small-cap US stocks experienced the largest gains. S&P 500 sectors were mixed with cyclical sectors outperforming defensive sectors.

So far in 2018 technology, consumer discretionary, and energy are the only sectors with positive performance, while all other sectors are displaying negative performance year-to-date. Consumer staples, telecommunications, and real estate have been the worst performing sectors so far this year.

Commodities

Commodities were positive as oil prices rose 1.47%. Oil prices reached a fresh three-year high during the week as strong demand resulted in a surprise drawdown in inventories. Along with increasing demand, OPEC-led production cuts and geopolitical tensions in Syria have supported prices in recent weeks.

Gold prices were negative with a 0.71% loss as the dollar index gained on rising interest rates and inflation expectations. While it was a negative week, a relatively weaker dollar combined with geopolitical uncertainties has resulted in slightly positive performance for the metal so far this year.

Bonds

The 10-year treasury yield increased sharply from 2.82% to 2.96%, resulting in negative performance for traditional US bond asset classes. Yields reached their highest levels since January 2014, largely driven by solid economic data and expectations of higher inflation, but remain relatively low on a historical basis.

High-yield bonds were also negative for the week as the increase in broad interest rates offset the positive impact of riskier asset gains. However, as long as the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds in the long-run as the risk of default is moderately low.

Asset class indices are mixed so far in 2018, with commodities leading the way and traditional bond categories lagging behind.

Lesson to be learned:

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

– Benjamin Graham.

People are emotional, and possess many biases when it comes to investing. A couple examples of these biases include hindsight (looking back and thinking it was easy to predict how things actually played out) and illusion of control (the tendency for people to overestimate their ability to control events they cannot actually influence). Unfortunately, these biases make us more susceptible to short-term market noise and poor investment decision making. This is why it is important to maintain a disciplined, emotion-free, investment strategy.

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 21.60, forecasting further economic growth and not warning of a recession at this time. The Bull/Bear indicator is currently 83% 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).

The Week Ahead

While Q1 2018 earnings season is officially underway, more than one-third of companies in the S&P 500 report results in the upcoming week (including companies such as Microsoft, Google, Facebook, and Amazon), making this an important week of data releases. The first estimate of Q1 GDP will also be released on Friday, which should provide a better picture of total economic strength.

More to come soon.  Stay tuned.

Regards,

Phil Calandra

 

The post Weekly Market Update – April 23, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – April 2, 2018

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 holiday-shortened week positive as large-cap US stocks experienced the largest gains. All S&P 500 sectors were positive for the week with defensive sectors outperforming cyclical sectors.

So far in 2018 technology and consumer discretionary are the only sectors with positive performance, while all other sectors are displaying negative performance year-to-date. Telecommunications, consumer staples, and energy have been the worst performing sectors so far this year.

Commodities: Commodities were negative as oil prices dropped 1.43%. Rising US production and a stronger dollar put pressure on oil prices during the week, but the longer-term trend remains positive as OPEC production cuts have supported prices since early 2016.

Gold prices were negative with a 2.09% loss as the dollar index increased for the fifth time in six weeks. While it was a negative week for gold, the metal is still positive in 2018 as the US dollar remains relatively weak and geopolitical uncertainties remain prevalent.

Bonds: The 10-year treasury yield fell from 2.82% to 2.74%, resulting in positive performance for traditional US bond asset classes. Yields had been trending higher in 2018, but despite the Fed hiking rates 0.25% following the March 21 meeting to a range of 1.50 – 1.75%, longer-term bond yields have fallen as demand for treasuries as a safe-haven asset class has increased in recent weeks.

High-yield bonds were positive for the week as riskier asset classes performed well. If the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds in the long-run as the risk of default is moderately low.

All asset class indices, with the exception of commodities, are currently negative in 2018.

Lesson to be learned: “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers. Short-term market corrections can be unnerving, but they are an inevitable part of investing and are often short-lived in relation to a longer-term bull market trend. However, there are certain times where these market corrections can turn into a prolonged bear market (such as 2008). This is why it is important to maintain a disciplined investment strategy focused on longer-term market tendencies rather than focusing on the 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 21.12, 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 positive, though equity markets remain choppy. While shorter-term momentum has pushed the S&P 500 lower, longer-term momentum remains intact as the Index is still within the trading range that has been in place over the past two years. The Index has tested the lower bounds of this trading range (which is inline with the 200-day simple moving average) in recent weeks, but has found support both times, indicating there may be a continuation of the longer-term bull market despite the shorter-term weakness. However, if the Index falls below this support threshold, it could result in further downward pressure as markets fall into a more bearish posture. 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 long-term bullish pattern for now.

*Chart created at StockCharts.com

Q1 comes to a close as volatility returns to the markets.

The first quarter of 2018 has officially come to a close and one thing is certain: it is not 2017 anymore. While 2017 was one of the quietest years in history for broad stock markets (the S&P 500 set a record for the least severe drawdown in a calendar year ever), volatility has returned to the markets in 2018. So far in 2018 stocks have advanced or declined by more than 2% in nine of the first 13 weeks, with no such weeks in all of 2017. Furthermore, the CBOE Volatility Index (VIX), which measures the stock markets expectation for volatility based on options trading of the S&P 500 Index, has closed above 15 in eight weeks this year, compared to closing above 15 in only two weeks last year.

As market sentiment has continued to swing wildly between optimism and pessimism, market fundamentals have remained mostly positive. The most recent earnings season (Q4 2017, which was reported throughout the first quarter of this year) was the strongest quarter of corporate growth since Q3 2011, as the blended earnings growth rate for the S&P 500 was 14.8%. For the upcoming earnings season beginning in April, the estimated earnings growth rate is even higher at 17.3%. The labor market has also continued to soar in 2018 as employers added over 200,000 jobs in both January and February.

While the first quarter of the year has been volatile, and at times emotionally draining, it is important to stay focused on the bigger picture. Even with all of the recent volatility and downward pressure, most indices (including bonds) are down only about 1 – 2% year-to-date. This snaps a string of nine consecutive positive quarters for the S&P 500 and Dow Jones Industrial Average, but in reality the losses were somewhat minimal compared to how 2018 has felt.

Even in the strongest of bull markets, stocks will not rise every day / week / month / quarter, and periodic pullbacks should be expected. These pullbacks can even be considered healthy for the continuation of a longer-term bull market. Higher levels of volatility can be expected during short-term market corrections, but the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong.

Short-term market corrections are only a small blip on the radar for long-term investors. However, economic data and market sentiment can change quickly. 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 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.

Regards,

Phil Calandra

The post 5 Minute Market Update – April 2, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – March 26, 2018

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 sharply negative as large-cap US stocks experienced the largest losses. All S&P 500 sectors were negative for the week with cyclical sectors underperforming defensive sectors.

So far in 2018 technology and consumer discretionary are the only sectors with positive performance, while all other sectors are displaying negative performance year-to-date. Telecommunications, consumer staples, and real estate have been the worst performing sectors so far this year.

Commodities: Commodities were positive as oil prices rose 5.68%. Oil prices surged on Friday after the Saudi Arabia energy minister said OPEC, as well as non-OPEC countries such as Russia, may need to extend the current production cuts into 2019. The longer-term trend of oil prices has been positive since early-2016, largely supported by these OPEC-led production cuts.

Gold prices were positive with a 2.87% gain as the dollar index fell for the first time in five weeks. The metal was largely supported by fear of a global trade war, sending investors toward more safe-haven asset classes.

Bonds: The 10-year treasury yield fell slightly from 2.85% to 2.82%, resulting in somewhat flat performance for traditional US bond asset classes. Yields had been trending higher in 2018, but despite the Fed hiking rates 0.25% following the March 21 meeting to a range of 1.50 – 1.75%, longer-term bond yields fell as demand for treasuries as a safe-haven asset class increased.

High-yield bonds were negative for the week as broad riskier asset classes experienced downward pressure, offsetting the positive impact of lower interest rates. However, if the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds longer-term as the risk of default is moderately low.

All asset class indices, with the exception of commodities, are currently negative in 2018.

Lesson to be learned: “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers. Short-term market corrections can be unnerving, but they are an inevitable part of investing and are often short-lived in relation to a longer-term bull market trend. However, there are certain times where these market corrections can turn into a prolonged bear market (such as 2008). This is why it is important to maintain a disciplined investment strategy focused on longer-term market tendencies rather than focusing on the 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 21.12, 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 sharply negative as equity markets remain choppy. While shorter-term momentum has pushed the S&P 500 lower, longer-term momentum remains intact as the Index is still within the trading range that has been in place over the past two years. The Index is currently re-testing the lower bounds of this trading range (which is inline with the 200-day simple moving average) similarly to early February. However, if the Index is able to find additional support at this level, it may illustrate a continuation of the longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.

*Chart created at StockCharts.com

Broad equity markets moved sharply lower on the week as investors fear global trade war.

On Thursday, President Trump announced plans to impose tariff increases on up to $60 billion of Chinese imports, following a seven-month investigation into intellectual property theft. The president directed US Trade Representative Robert Lighthizer to produce a proposed list of Chinese products to be hit with higher tariffs within 15 days, after which a finalized list will be made public. China’s commerce ministry revealed a list of 128 US products as potential targets for tariffs on Friday, in a retaliation to Trumps statement. This sent the S&P 500 tumbling almost 6% lower as the concerns of a global trade war heightened, marking the worst week for the Index since January 2016.

With the sharp move lower, stocks have now advanced or declined by more than 1% in 10 of the first 12 weeks in 2018, compared to only 13 such weeks in all of 2017. Furthermore, there have already been eight weeks this year in which markets have advanced or declined by more than 2%, with no such weeks in all of 2017. So with the continued volatility and recent downward pressure, is it time to worry about a more pronounced bear market or are we just experiencing a continued normal market correction?

As stated in our blog post from February 12, immediately following the sudden 10% drop in the S&P 500, a correction in the US stock market happens approximately once every year. Generally, less than 20% of market corrections turn into more pronounced bear markets, but even the average bull market correction takes around four months to recover back to new all-time-highs. While volatility has seemed high over the past couple of months, higher volatility can be expected during these pull-backs as investors recalibrate their portfolios. Though shorter-term market momentum has been volatile and somewhat negative, the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong.

Even in the strongest of bull markets, stocks will not rise every day / week / month, and periodic pullbacks should be expected. These pullbacks can even be considered healthy for the continuation of a longer-term bull market.

Short-term market corrections are only a small blip on the radar for long-term investors. However, economic data and market sentiment can change quickly. 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 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.

Regards,

Phil Calandra

The post 5 Minute Market Update – March 26, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – March 19, 2018

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 negative as large-cap US stocks experienced the largest losses. S&P 500 sectors were mostly negative for the week with defensive sectors outperforming cyclical sectors.

So far in 2018 technology, consumer discretionary, and financials are the strongest performers while telecommunications, energy, and consumer staples have been the worst performing sectors.

Commodities: Commodities were flat as oil prices fell 0.22%. While the longer-term trend of oil prices has been positive, largely supported by OPEC production cuts, momentum has slowed in recent weeks due to concerns about rising US output.

Gold prices were negative with a 0.88% loss as the dollar index rose for the fourth consecutive week. The metal has experienced some downward pressure in recent weeks, but is still flat for the year.

Bonds: The 10-year treasury yield decreased from 2.90% to 2.85%, but remains near its highest level since the beginning of 2014. As yields fell, traditional US bond asset classes were positive. Bond prices and interest rates move inversely, so lower rates generally lead to higher prices.

High-yield bonds were negative for the week as broad riskier asset classes experienced downward pressure, offsetting the positive impact of lower interest rates. However, if the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds as the risk of default is moderately low.

All equity asset class indices are currently positive in 2018 while bonds asset class indices are currently negative.

Lesson to be learned: “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers. Short-term market corrections can be unnerving, but they are an inevitable part of investing and are often short-lived in relation to a longer-term bull market trend. However, there are certain times where these market corrections can turn into a prolonged bear market (such as 2008). This is why it is important to maintain a disciplined investment strategy focused on longer-term market tendencies rather than focusing on the 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 21.12, 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 negative as equity markets remain choppy. While shorter-term momentum has pushed the S&P 500 lower, longer-term momentum remains intact as the Index is still within the trading range that has been in place over the past two years. The index tested the lower bounds of this trading range (which is inline with the 200-day simple moving average) in early February, but seemed to find support and has rallied off its lowest levels. This illustrates there may be support for a continued longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.

*Chart created at StockCharts.com

Broad equity markets experienced another volatile week of trading as March Madness is officially underway.

When it comes to surprises and thrills in the world of sports, the NCAA basketball tournament, dubbed March Madness, is second to none. Every year there is a plethora of upsets, with lower-ranked teams beating the heavily-favored teams. However, while many people get caught-up in the excitement of the buzzer beaters and Cinderella stories from the tournament, these low-ranked teams rarely advance past the first weekend, and the higher-ranked teams are generally crowned champions when all is said and done. In fact, there have only been three teams lower than a number four seed to win the entire tournament, while a number one seed wins about 61% of the time. So if you are looking to have the best odds of winning your bracket pool, it generally pays to favor the highest ranked teams winning in the long-term.

The same can be said for investing in financial markets. There are periods of time, such as the past few months, when markets are volatile and unpredictable in the short-term. In times like these, it can be easy to let emotions take over and to make investment decisions based on daily new headlines. However, in the longer-term it is important to ignore the daily noise and focus on the main drivers behind investment performance, such as the health of the economy and corporate earnings, rather than making knee-jerk decisions based on what is hot right now. As investors, we need to stay committed to our game plan, focusing on our long-term financial goals.

Though shorter-term market momentum has been volatile and somewhat negative, the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong.

More to come soon.  Stay tuned.

Regards,

Phil Calandra

The post 5 Minute Market Update – March 19, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – March 13, 2018

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 as small-cap US stocks experienced the largest gains. All S&P 500 sectors were positive for the week with with cyclical sectors outperforming defensive sectors.

So far in 2018 technology, consumer discretionary, and financials are the strongest performers while real estate, energy, and utilities have been the worst performing sectors.

Commodities: Commodities were positive as oil prices rose 1.29%. Oil prices have been in an upward trend since mid-2017, largely supported by falling US inventories and continued OPEC production cuts.

Gold prices were mostly flat with a 0.05% gain for the week as the dollar index steadied. The metal has experienced some downward pressure in recent weeks, but is still positive for the year.

Bonds: The 10-year treasury yield increased from 2.86% to 2.90%, remaining near its highest level since the beginning of 2014. As yields increased, traditional US bond asset classes were slightly negative. Bond prices and interest rates move inversely, so higher rates generally lead to lower prices.

High-yield bonds were positive for the week as broad riskier asset classes experienced upward pressure, offsetting the negative impact of higher interest rates. If the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds as the risk of default is moderately low.

All equity asset class indices are currently positive in 2018 while bonds asset class indices are currently negative.

Lesson to be learned: “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers. Short-term market corrections can be unnerving, but they are an inevitable part of investing and are often short-lived in relation to a longer-term bull market trend. However, there are certain times where these market corrections can turn into a prolonged bear market (such as 2008). This is why it is important to maintain a disciplined investment strategy focused on longer-term market tendencies rather than focusing on the 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 21.12, 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 as the Index has now experienced a weekly move of 2% or more in six of the past seven weeks (for comparison, there was only one such week with over a 2% Index move in all of 2017). While shorter-term momentum has pushed the S&P 500 lower, longer-term momentum remains intact as the Index remains in the trading range that has been in place over the past two years. The index tested the lower bounds of this trading range (which is inline with the 200-day simple moving average) a few weeks ago, but seemed to find support and has rallied off its lowest levels. This illustrates there may be support for a continued longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.

*Chart created at StockCharts.com

Broad equity markets rallied as tariff jitters eased and job growth surged.

On Thursday, President Trump stated the recently announced steel and aluminum tariffs would exclude imports from Canada and Mexico. Trump said he is also open to negotiations with other countries and regions in which the US has a strong relationship – specifically the European Union. This sent stocks higher as tensions surrounding the tariffs somewhat decreased. The newly enacted tariffs, which essentially impose a 25% tax on steel and a 10% tax on aluminum imported to the US, are to go into effect on March 23.

As the positive news regarding the tariffs pushed markets higher on Thursday, the rally continued on Friday following a strong employment report. According to the report, payrolls soared in February as the labor market added 313,000 jobs compared to the expected gain of 200,000. This huge gain in jobs illustrates even though the labor market is in its ninth year of steady expansion, there is still room to grow before “full employment” is reached. The unemployment rate remained at 4.1%, its lowest level since December 2000, while the labor force participation rate increased from 62.7% to 63%.

Though shorter-term market momentum has been volatile and somewhat negative, the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong. Even in the strongest of bull markets, stocks will not rise every day / week / month, and periodic pullbacks should be expected. These shorter-term pullbacks can even be considered healthy for the continuation of a longer-term bull market.

Short-term market corrections are only a small blip on the radar for long-term investors. However, economic data and market sentiment can change quickly. 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 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.

Regards,

Phil Calandra

The post 5 Minute Market Update – March 13, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – March 6, 2018

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 negative as large-cap US stocks experienced the largest losses. All S&P 500 sectors were negative for the week with no discernable difference between cyclical and defensive sectors.

So far in 2018 technology, consumer discretionary, financials, and healthcare are the strongest performers while all other sectors are negative.

Commodities: Commodities were negative as oil prices fell 3.62%. While the longer-term positive trend of oil prices has been supported by OPEC production cuts, prices dropped during the week on pressure from a stronger dollar and surging US output.

Gold prices fell 0.52% for the week as the dollar index strengthened to a near six-week high level. This was the second consecutive week of losses for gold, but the metal is still positive in 2018 as the US dollar remains relatively weak despite the recent support.

Bonds: The 10-year treasury yield decreased slightly from 2.88% to 2.86%, remaining near the highest level since the beginning of 2014. As yields remained mostly steady, aggregate US bonds were mostly flat amid continued speculation the Fed may hike rates faster than expected in 2018. Bond prices and interest rates move inversely, so higher rates generally lead to lower prices.

High-yield bonds were slightly negative for the week as broad riskier asset classes experienced downward pressure. However, if the economy remains healthy, higher-yielding bonds are expected to continue performing well as the risk of default is moderately low.

Most asset class indices are negative so far in 2018, with intermediate treasury bonds experiencing the largest losses.

Lesson to be learned: “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – John Bogle, founder of Vanguard. As frustrating as it can be at times, the stock market has its ups and downs. The risks of investing in stocks goes hand-in-hand with the higher return potential compared to safer investments such as bonds or bank CDs. While it may be tempting make knee-jerk decisions when markets move quickly, we need to stay focused on our long-term investment objectives. Keeping a disciplined investment strategy can reduce daily market noise and increase the odds of a successful outcome over time.

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 21.35, 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 negative following two consecutive weeks of gains. While shorter-term momentum has pushed the Index lower, longer-term momentum remains intact as the Index remains in the trading range that has been in place over the past two years. The index tested the lower bounds of this trading range (which is inline with the 200-day simple moving average) a few weeks ago, but seemed to find support and has rallied off its lowest levels. This illustrates there may be support for a continued longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.

 

*Chart created at StockCharts.com

Stocks moved lower on tariff jitters, though corporate earnings remain strong.

After gains in the previous two weeks, stocks moved lower as President Trump announced a plan to introduce tariffs on steel and aluminum. These tariffs would effectively add an additional tax of 25% on steel and 10% on aluminum imported to the US. While this may be mildly positive for the trade balance in these materials, steel and aluminum account for less than 3% of total US imports, so the net economic impact will likely be fairly small if the tariffs remain in place longer-term. However, many investors fear the retaliation risk from other countries spanning across other industries. Immediately following the announcement on Thursday, US companies that supply these raw materials soared while US companies that purchase large amounts of steel and aluminum fell sharply.

While investors speculated about the impact these tariffs could have on broad financial markets, Q4 2017 earnings season has started to wind-down. With 97% of the companies in the S&P 500 having already reported results, 74% of companies have beat earnings expectations. The blended S&P 500 earnings growth rate currently stands at 14.8%, compared to the initial expectation of 11% before the earnings season began. If this growth rate holds, it will mark the highest level of earnings growth since Q3 2011. Furthermore, the first couple of months in 2018 has seen the largest number of upward earnings revisions to start the year since FactSet began tracking the data in 2002, illustrating many analysts expect continued strong corporate earnings through 2018.

Though shorter-term market momentum has been volatile and somewhat negative, the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong. Even in the strongest of bull markets, stocks will not rise every day / week / month, and periodic pullbacks should be expected. These shorter-term pullbacks can even be considered healthy for the continuation of a longer-term bull market.

Short-term market corrections are only a small blip on the radar for long-term investors. However, economic data and market sentiment can change quickly. 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 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.

Regards,

Phil Calandra

The post 5 Minute Market Update – March 6, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – February 26, 2018

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 as large-cap US stocks experienced the largest gains and international stocks experienced small losses. S&P 500 sectors were mixed for the week with cyclical sectors outperforming defensive sectors.

So far in 2018 technology, consumer discretionary, and financials are the strongest performers while real estate, energy, and telecommunications have been the worst performing sectors so far this year.

Commodities: Commodities were positive as oil prices rose 3.03%. This was the second consecutive strong week for oil as a dip in Libyan production and positive comments from Saudi Arabia regarding the OPEC production cuts helped push prices higher. While US production is expected to rise for the foreseeable future, which could cap gains in oil, the OPEC production cuts have supported a longer-term positive trend.

Gold prices fell 1.91% for the week as the dollar strengthened. While this was the worst week for gold since early December, the metal is still positive in 2018 as the US dollar remains relatively weak.

Bonds: The 10-year treasury yield increased slightly from 2.87% to 2.88%, remaining near the highest level since the beginning of 2014. As yields remained mostly steady, aggregate US bonds were mostly flat amid continued speculation the Fed may hike rates faster than expected in 2018. Bond prices and interest rates move inversely, so higher rates generally lead to lower prices.

High-yield bonds were mostly flat for the week as credit spreads remained stable. If the economy remains healthy, higher-yielding bonds are expected to continue performing well as the risk of default is moderately low.

All equity asset class indices are currently positive in 2018 while bonds asset class indices are currently negative.

Lesson to be learned: “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – John Bogle, founder of Vanguard. As frustrating as it can be at times, the stock market has its ups and downs. The risks of investing in stocks goes hand-in-hand with the higher return potential compared to safer investments such as bonds or bank CDs. While it may be tempting make knee-jerk decisions when markets move quickly, we need to stay focused on our long-term investment objectives. Keeping a disciplined investment strategy can reduce daily market noise and increase the odds of a successful outcome over time.

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 21.35, 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 second consecutive week immediately following its first 10% correction since early 2016. While shorter-term momentum has pushed the Index lower, longer-term momentum remains intact as the Index remains in the trading range that has been in place over the past two years. The index tested the lower bounds of this trading range (which is inline with the 200-day simple moving average) three weeks ago, but seemed to find support and has rallied off its lowest levels. This illustrates there may be support for a continued longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.

*Chart created at StockCharts.com

US stocks pushed modestly higher as volatility persisted through the holiday-shortened week.

After essentially moving only up and to the right in 2017, stocks have been much more volatile this year. Though volatility has somewhat subsided since its rapid spike higher in early February, markets have continued to swing up and down. Last week saw this to a smaller extent as the S&P 500 was down over 1% by mid-week before rallying to end the week with modest gains. The average daily price movement for the Index in February has been 1.3%, compared to an average daily movement of 0.3% for all of 2017. While intra-week volatility was still present, this week broke the wild ride in which the S&P 500 experienced its worst week in two years directly followed by its best week in five years.

Many investors expect this higher volatility environment to persist in the near-term as market participants continue to speculate about economic growth and interest rates. Rates have been moving higher recently for the same reason the stock market had been rising (a strong economy), and the fear of higher rates removing momentum from the bull market is what sparked the recent market correction and higher levels of volatility in the first place.

However, it is important to remember interest rates are still historically low. While the 10-year treasury yield has sharply increased from 2.05% to 2.88% since early September, this is not as severe as the move from 1.66% to 3.04% back in 2013 – and that move did not kill the bull market as stocks have continued higher, though not without a few short-term corrections along the way. The Fed is expected to raise rates three times in 2018, but considering the relatively low level of current rates, this should be considered more like letting the foot off the accelerator rather than slamming the brakes on the markets and economy.

Though shorter-term market momentum has been volatile and somewhat negative, the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong. Even in the strongest of bull markets, stocks will not rise every day / week / month, and periodic pullbacks should be expected. These shorter-term pullbacks can even be considered healthy for the continuation of a longer-term bull market.

Short-term market corrections are only a small blip on the radar for long-term investors. However, economic data and market sentiment can change quickly. 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 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.

Regards,

Phil Calandra

The post 5 Minute Market Update – February 26, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – January 29, 2018

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 as large-cap US stocks experienced the largest gains. All S&P 500 sectors finished the week positive as cyclical sectors slightly outperformed defensive sectors.

So far in 2018 healthcare, consumer discretionary, and technology are the strongest performers while utilities and real estate are the only sectors with negative performance year-to-date.

Commodities: Commodities were positive as oil prices increased 4.37%. US crude oil prices reached $65 a barrel for the first time since December 2014, setting a new 3-year high following the 10th consecutive weekly drop in US inventories.

Gold prices rose 1.43% as the dollar continued to slide. A weaker dollar makes dollar-denominated assets, such as gold, less expensive for holders of other currencies, pushing prices higher.

Bonds: The 10-year treasury yield rose slightly from 2.64% to 2.66%, resulting in mostly flat performance for treasury and aggregate bonds. Yields have continued to trend higher recently on expectations that the Fed may hike rates faster than originally anticipated amid stronger economic growth and fiscal stimulus in 2018.

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

All riskier asset class indices are currently positive in 2018, but treasury and US aggregate bonds are currently negative.

Lesson to be learned: “The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman. Markets tend to move in broad cycles. However, when crisis seems to strike (or even when things appear too good to be true), a herd mentality can form as investors copy the behavior of others because they are influenced to act and think in a certain way. By maintaining a broadly diversified blend of asset classes and eliminating emotions from the investment process when making decisions, you can look to take advantage of the major trends caused from the herd mentality, improving your probability of long-term 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 19.28, 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 ninth time in ten weeks as the Index has started 2018 on a strong note and remains firmly in the upward trend that began in mid-February 2016. Since February 12, 2016, the S&P 500 is up 57.07%. Shorter-term momentum has continued as the Index recorded fresh all-time highs and remained above the upper trading range that has been in place over the past two years, illustrating there may still be further gains ahead. 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 399 trading days – the 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

Stocks continued to soar, and the S&P 500 is trading in a way it hasn’t seen in decades.

Through the end of last week, the S&P 500 has closed at a record-high 14 times since the beginning of the new year, marking the most records in any month since June 1955. Furthermore, the 7.45% gain so far in January has put the S&P 500 on track for its strongest first month since 1989. There have been 13 years where the S&P 500 has risen by more than 5% in January – in those years, the Index has averaged an additional 11% gain for remainder of the year and has never finished the year negative (though this does not guarantee gains through the remainder of 2018).

While some economists may attribute this recent performance to the “January effect”, which is the hypothesis that stock prices increase more in January than any other individual month, the strong start to 2018 seems to have supportive data behind it. January’s gains reflect recent positive economic conditions and encouraging corporate earnings announcements, which are in part benefiting from the optimism around tax reform. With strong employment, the prospects of rising wages, high consumer confidence, a healthy housing market, and strong corporate earnings, the broad economy looks healthy. However, it would not be unreasonable to expect higher volatility and downside risk than what has been experienced in the past couple years.

Though the prospects of 2018 remain positive as we start the year, economic data and market sentiment can change quickly. 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 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.

Regards,

Phil Calandra

The post 5 Minute Market Update – January 29, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara

5 Minute Market Update – January 23, 2018

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 as large-cap US stocks experienced the largest gains. S&P 500 sectors finished the week mixed as there was no discernable difference in the performance between cyclical sectors and defensive sectors.

So far in 2018 consumer discretionary, healthcare, and technology are the strongest performers while utilities, real estate, and telecommunications are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the first time in five weeks as oil prices fell 1.45%. While the OPEC-led output cuts have been supporting oil in recent weeks, the International Energy Agency warned rapidly increasing production in the United States could threaten market balancing, pushing prices slightly lower.

Gold prices fell 0.13%, snapping a streak of five consecutive weeks of gains for the metal.

Bonds: The 10-year treasury yield rose from 2.55% to 2.64%, resulting in negative performance for treasury and aggregate bonds. Yields have continued to trend higher recently on expectations that the Fed may hike rates faster than originally anticipated amid stronger economic growth and fiscal stimulus in 2018.

High-yield bonds were mostly flat as the negative impact of higher interest rates was largely offset by the positive performance in riskier asset classes. 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.

All riskier asset class indices are currently positive in 2018, but treasury and US aggregate bonds are currently negative.

Lesson to be learned: “The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman. Markets tend to move in broad cycles. However, when crisis seems to strike (or even when things appear too good to be true), a herd mentality can form as investors copy the behavior of others because they are influenced to act and think in a certain way. By maintaining a broadly diversified blend of asset classes and eliminating emotions from the investment process when making decisions, you can look to take advantage of the major trends caused from the herd mentality, improving your probability of long-term 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 19.28, 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 eighth time in nine weeks as the Index has started 2018 on a strong note and remains firmly in the upward trend that began in mid-February 2016. Since February 12, 2016, the S&P 500 is up 53.65%. Shorter-term momentum has continued as the Index recorded fresh all-time highs and remained above the upper trading range that has been in place over the past two years, illustrating there may still be further gains ahead. 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 394 trading days – the third 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 logged another positive week in spite of rising concerns surrounding a government shutdown.

As of Friday afternoon, the Senate had failed to pass a new budget deal. Without a deal in place the government shuts down and many federal employees stop receiving their paychecks until a new funding deal is reached. The last time this happened was in 2013, where approximately 800,000 federal employees were furloughed between October 1 – October 17. Though the true impact of a government shutdown depends on the unique scenario in which it happens, historically, for each week a deal is not reached it reduces GDP by 0.20% for the quarter in which the shutdown occurred.

However, once the government re-opens, federal workers receive back pay for the time they missed—meaning that GDP growth typically rebounds in the following quarter. Due to this typical rebound, financial markets tend to shrug off the anxieties of a shutdown, treating the news as normal market noise and not something that will shift the fundamentals of the underlying economy in the long-term. This mindset, coupled with another strong week of earnings reports helped push equity markets higher, even in the face of the growing negative press at the end of the week.

*As of Monday evening president Trump signed a bill to fund the government through February 8.

Though the prospects of 2018 appear positive as we start the year, economic data and market sentiment can change quickly. 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 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.

Regards,

Phil Calandra

The post 5 Minute Market Update – January 23, 2018 appeared first on The Blog of Phil Calandra.

Source: Phil Calandara