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 mostly negative with small-cap US 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 utilities are the strongest performers while energy and telecommunications are the only sectors with negative performance year-to-date.

Commodities: Commodities were negative for the week as oil prices fell 0.63%. Oil prices have been volatile so far in 2017 as the positive effects of strengthening demand have been conflicting with the negative effects of high global supply. The most recent large move was to the positive side four weeks ago as reports showed US oil and gasoline inventories fell more than expected and Saudi Arabia announced it would further reduce output. Gold prices fell 0.19%, but remain moderately positive with a 12.32% gain YTD.

Bonds: The 10-year treasury yield remained at 2.19%, resulting in mostly flat performance for treasury and aggregate bonds.

High-yield bonds were slightly positive as the negative impact of riskier asset classes experiencing losses was offset by lower credit spreads.

Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.

Lesson to be learned: “Remember that the stock market is a manic depressive.” –  Warren Buffett. Sometimes the market is sensible and prices are based on economic and business developments. However, at other times the market can be emotionally unstable, swinging from euphoria to pessimism in an instant. By sticking to a disciplined investment strategy you can minimize the effect that emotions can have on your portfolio, improving your chances for 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 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 24.69, 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 negative for the second consecutive week, but remains in the upward trend that began in mid-February 2016. While intermediate and long-term momentum remains positive, shorter-term momentum has slowed as the Index closed below its three-month moving average for the first time since April. Many indices have reached new all time highs multiple times this year, illustrating there may still be further gains ahead, but volatility and downward pressure has slightly increased in recent weeks. The coming weeks should continue to provide valuable insight about the near-term direction of the S&P 500, but it seems to remain in a bullish pattern for now.

*Chart created at StockCharts.com

US stocks were broadly negative for the second consecutive week as political tensions continued to drive markets lower.

Since reaching record-low levels of volatility in July, the S&P 500 has recorded two of its three worst trading days over the past two weeks. The most recent pullback follows heightened concerns that focus is being diverted from President Trump’s agenda with other political distractions. However, there have been similar short-term pullbacks in 2017 that markets have quickly shrugged-off (a 1.8% drop in March as the initial health care reform bill failed to find support and a 1.9% drop in May following the controversy with former FBI Director James Comey).

While political worries have pushed stocks lower in recent weeks, market fundamentals seem to remain healthy for now. Q2 2017 earnings have been strong as the blended S&P 500 earnings growth rate currently stands at 10.2%, compared to the initial estimate of 6.5% on June 30 before earnings season started. The labor market also remains strong as the economy continues to add jobs at a resilient pace and unemployment is at its lowest level since 2001.

Though healthy economic data cannot protect markets against normal levels of volatility, history shows fundamentals drive longer-term market performance a majority of the time. Generally, as long as there are no further clear reasons for a sell-off (such as an economic slowdown or a war), political tensions are short-lived and end up just becoming a bump in the road. With earnings and job growth remaining strong, the economy seems to remain on solid footing for now.

The recent spike in volatility reminds us why it is important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results. Individual stocks, sectors, and indices can go from periods of over-performance to under-performance without a moments notice.

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