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.
Equities: Broad equity markets finished the week flat to negative with small-cap stocks experiencing the largest losses. S&P 500 sectors finished the week mixed as defensive sectors generally outperformed cyclical sectors.
So far in 2017 technology, consumer discretionary, and healthcare 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 3.24%. Oil prices had experienced some recent downward pressure as investors began to fear the current OPEC production cuts may not be enough to reduce global oversupply, but prices have spiked back up following news of support for a potential OPEC production cut extension. Gold prices rose 0.49% for the week as gold remains moderately positive for the year.
Bonds: The 10-year treasury yield fell slightly from 2.40% to 2.38%, resulting in small gains for treasury and aggregate bonds.
High yield bonds were flat as risky assets faltered and broad interest rates fell 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: Paul Samuelson once said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Proper investing requires a large amount of patience, which can be difficult for many investors to maintain at times. However, if you create and stick to a disciplined investment strategy, the gains you see over time will become exciting in the long-term.
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 negative, but 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 so far this year. 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.
US stocks finished flat to negative for the week as investors turned focus to job growth.
The employment report released on Friday showed payrolls increasing by only 98,000 in March, well short of the expected of 180,000. This is a notable slowdown from January and February and seems weak on the surface, but the labor markets remain relatively healthy. Payroll gains were strong in previous months in part due to seasonal factors and a mild winter. The additional hiring at the beginning of the year that would have occurred in March was compounded by March’s unusually harsh weather, which further depressed job growth for the month.
While job growth fell flat, the unemployment rate declined to 4.5%, marking the lowest level since the financial crisis. This was positive news as the participation rate remained steady at 63%.
With the most recent employment report past and the next Fed meeting not until early May, investors will now turn attention toward earnings. For Q1 2017, the estimated earnings growth rate for the S&P 500 is 8.9%. If the index meets this growth rate for the quarter, it will mark the highest year-over-year earnings growth rate for the index since Q4 2013.
Stocks have been performing well for the past five months with minimal volatility and virtually no drawdowns, but it is still important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results.
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.
Derek Prusa, CFA, CFP®
Senior Market Analyst