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 with small-cap stocks experiencing the largest gains. S&P 500 sectors finished the week mixed as cyclical sectors generally outperformed defensive sectors.

So far in 2017 technology, consumer discretionary, and healthcare are the strongest performers while energy, telecommunications, and financials are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the week as oil prices fell 6.69%. Oil prices had experienced some recent upward pressure on news of support for a potential OPEC production cut extension, but renewed concerns that higher US production will impede OPEC’s attempts to reduce global supply pushed prices lower. Gold prices were mostly flat with a gain of 0.05% for the week and remain positive for the year as volatility and investor uncertainty has increased in recent weeks.

Bonds: The 10-year treasury yield stayed steady at 2.24% with minimal fluctuations through the week, resulting in mostly flat performance for treasury and aggregate bonds.

High yield bonds were positive as risky assets performed well and credit spreads fell slightly.

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.

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 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 positive and 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 to remain in a bullish pattern for now.

 

 

US stocks finished positive for the week as comments regarding tax reform and strong corporate earnings lifted investor sentiment.

Treasury Secretary Steven Mnuchin announced on Thursday the Trump administration is close to bringing forward a major tax reform. This was followed on Friday by President Trump stating he will unveil his tax plan in the upcoming week. The initial goal was to get a tax bill passed by August, but Mnuchin said the end of the year seems like a more realistic goal now.

Adding to the positive sentiment during the week, corporate earnings continued to come in moderately strong. Of the companies in the S&P 500 that have reported earnings for Q1 2017 so far, 76% beat the average earnings estimate and 59% beat the average sales estimate. The current expected earnings growth rate for the S&P 500 is 9.2%, which would mark the highest year-over-year growth rate since Q4 2011.

With companies performing relatively well and the S&P 500 remaining near its all-time high, how robust has the market rally really been so far in 2017? As of Friday’s close, the S&P 500 is up 4.91%. However, much of the gain can be attributed solely to 15 companies (Apple, Microsoft, Amazon, Facebook, Johnson & Johnson, Alphabet, Procter & Gamble, Home Depot, Comcast, Philip Morris, Visa, Disney, UnitedHealth, Cisco, and PepsiCo). These 15 companies make-up approximately 21.62% of the weight of the S&P 500 index but have accounted for 58.24% of the returns so far this year.

It appears on the surface the positive stock market performance in 2017 has been somewhat narrow, but approximately 66% of companies in the S&P 500 are positive so far this year. So while a few large stocks are doing most of the heavy lifting at the moment, many stocks are still in positive territory for 2017, illustrating the US stock market in general seems relatively healthy at the moment.

Stocks had been performing well since the US presidential election 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.

Regards,

Derek Prusa, CFA, CFP®
Senior Market Analyst