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 negative with small-cap stocks experiencing the largest losses. S&P 500 sectors finished the week mostly negative as defensive sectors generally outperformed cyclical sectors.
So far in 2017 technology, healthcare, and consumer discretionary are the strongest performers while energy, telecommunications, and financials are the only sectors with negative performance year-to-date.
Commodities: Commodities were positive for the week as oil prices rose 1.80%. 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 2.48% for the week and remains positive for the year as volatility and investor uncertainty have increased in recent weeks.
Bonds: The 10-year treasury yield fell from 2.38% to 2.24%, resulting in gains for treasury and aggregate bonds.
High yield bonds were slightly negative as risky assets faltered and broad interest rates fell 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 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 negative for the week as geopolitical risks – such as tensions between the US and countries like Syria and North Korea – have become an increasing concern in recent weeks.
Worry regarding North Korea’s nuclear weapons program increased last week as threatening language and actions from the country has escalated. National security adviser Lt. Gen. H.R. McMaster has stated “this problem is coming to a head. And so it’s time for us to undertake all actions we can, short of a military option, to try to resolve this peacefully.” The US has recently leaned on China to apply pressure to North Korea to reduce its nuclear aspirations by using economic forces, such as reducing imports from the country until it becomes more cooperative.
Adding to the recent bout of geopolitical uncertainty, France will be holding a presidential election next week. This is the second significant election in Europe so far this year (following the Netherlands election in March). Opinion polls suggest Emmanuel Macron and Marine Le Pen remain the frontrunners, but the results are still largely unpredictable as numerous candidates are within striking distance. While Macron is the favorite to win the election, it could create additional political turmoil and uncertainty in Europe if Le Pen is elected. Le Pen is in support of France exiting the European Union, and anti-immigration policies.
It is still unclear if these risks will have a long-term effect on global equity markets, as they appear to be more smoke than fire as of now, but it has increased market volatility and investor uncertainty in the short-term.
Stocks had been performing well since the US presidential election with minimal volatility and virtually no drawdowns, but recent weeks have shown 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.
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