Market Braces for Upcoming Fed Meeting

Trust Dale CFG5-Minute Market Update  |  September 20, 2016

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, finances should be simple, not complicated.

Market Update

Equities: Broad equity markets finished mostly positive for the week as only international stocks experienced losses. S&P 500 sectors finished the week mixed with defensive sectors generally outperforming cyclical sectors.

So far in 2016 utilities, telecommunications, and energy are the strongest performers while financials is the only sector with negative performance year-to-date.

Commodities: Commodities were negative for the week as oil dropped 6.21%. Oil has been negative three of the past four weeks, but remains well above the year-to-date lows from February. Gold fell 1.83%, but remains considerably positive for the year.

Bonds: The 10-year treasury yield increased slightly from 1.67% to 1.70% as treasury and aggregate bonds ended the week mostly flat.

High yield bonds were slightly positive, but broad interest rate increases somewhat negated the gains experienced from the positive performance in riskier assets.

Most indices remain positive (modestly) for 2016, with high yield bonds leading the way.

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Lesson to be learned: Warren Buffett once said “the stock market is a device for transferring money from the impatient to the patient.” Impatient investors allow emotions to guide their decisions, often leading to self-destructive portfolio behavior. This is why is is important to remain patient. Maintaining a smart and disciplined investment strategy will improve your chances of 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 future posts, I’ll write more about how these indicators are built and why we feel they are important.

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) most recently decreased from 25.33 to 22.76, which signaled a slightly positive shift in the US Economy. The Bull/Bear indicator is currently 33.33% bullish, 33.33% neutral, and 33.33% bearish (averaging 50% bullish and 50% bearish). This means our models remain neutral regarding the stock market direction in the near term (think <18 months).

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Weekly Comments & Charts

The S&P 500 finished the week positive as the index remained near the critical support level of 2,130. Prices stalled during the summer as there had not been a definitive move up or down since the S&P 500 broke through the ceiling set back in May 2015, but the past couple of weeks have seen an increase in price movement. This could indicate an important inflection point in the equity markets. If the S&P 500 uses this old ceiling as a level of support, it could signal that markets are experiencing true positive momentum and are ready to continue making new all time highs. However, if the S&P 500 continues to fall, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. The coming weeks should give some valuable insight about the near-term direction of the S&P 500.

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Broad US equity markets ended positive for the week as they halted the losses from the previous week.

The S&P 500 had been trading in a historically narrow pattern throughout the summer, but September 9 snapped a 59-day streak in which the S&P 500 had no daily moves of 1% or more. This was the narrowest trading range in the history of the S&P 500 dating back to 1928. Since the streak of low volatility has ended, four of the past six trading days for the S&P 500 have seen movements of 1% or more. The increase in recent volatility has mostly been driven by the speculation surrounding the upcoming Fed meeting scheduled for September 20 – 21 and the decision to raise interest rates.

A 0.25% rate hike wouldn’t necessarily impact the economy too much over the course of a couple of months, but the remaining uncertainty leading up to a decision will likely cause a higher level of market volatility to persist until a clearer path is formed. Though there has been increasing speculation surrounding the topic, market participants are not expecting any rate increases until at least the end of 2016. The implied probability of a rate hike for the upcoming September meeting this week remains low at only 15%, but increases to 56.5% for the December meeting. One thing is certain though, all eyes will be on the Fed this week.

While market trends and history are useful for study, there’s always more to investing than just the charts and trends. We need to be a little cautious about increasing global uncertainties and the election that is right around the corner.

Most importantly, 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