S&P Ends Month Negative for First Time Since February

5-Minute Market Update  |  September 6, 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 positive for the week with international equities leading the way. S&P 500 sectors finished the week mixed with cyclical sectors generally outperforming defensive sectors.

So far in 2016 telecommunications, utilities, and energy are the strongest performers; no sectors currently have negative performance year-to-date.

Commodities: Commodities were negative for the week as oil fell 6.72%. Oil had seen positive performance through most of August, but prices dropped sharply as the prospects of Russia and Saudi Arabia collaborating to stabilize oil production waned. Gold was mostly flat with only a 0.05% gain, but remains considerably positive for the year.

Bonds: The 10-year treasury yield fell slightly from 1.62% to 1.60%, leading to positive performance in treasury and aggregate bonds.

High yield bonds were positive as broad interest rate declines enhanced 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 29.8 to 25.33, 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, but remained within the narrow trading range experienced over the past month and a half. Since the S&P 500 broke through the ceiling set back in May 2015, prices seem to have stalled as there has not been a definitive move up or down. Generally, in technical analysis, a prolonged narrow trading range leads to either a sharp upside or sharp downside breakout. Over the next few weeks we would like to see increasing volume accompanied by a positive breakout in prices. This would signal that the momentum has officially shifted to a more positive outlook. The coming weeks should give some valuable insight about whether the S&P 500 will turn the old level of resistance into a level of support or if the markets pull back again and retreat into the sideways/downward trading pattern.

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Broad equity markets ended positive for the week, but the S&P 500 finished the month of August negative. This is the first time the S&P 500 has finished a month negative since February.

The Index was mostly flat throughout the month as it did not move 1% or more in any direction for a single day the entire month. Though it seems the US equity markets have decided to take a break, the lack in action is not expected to last much longer. Investors will be speculating about the possibility of a rate hike as they eye the next Fed meeting later in September.

The recent jobs report on September 2 came in lower than expected, but showed the job market supply is still strong enough to keep pace with the recent demand. Employment figures were not strong or weak enough to provide much guidance of when the Fed may decide to raise rates, so there is still a large amount of uncertainty surrounding the timing of a decision. This uncertainty is expected to lead to an increase in volatility until there is more firm guidance for the path of interest rates in the near-term.

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