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

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

Commodities: Commodities were negative for week as oil prices fell 0.26%. Oil prices have been volatile so far in 2017 as the positive effects of strengthening demand has been conflicting with the negative effects of high global supply. The most recent large move was to the positive side two weeks ago as reports showed US oil and gasoline inventories fell more than expected and Saudi Arabia announced it would further reduce output in August. Gold prices fell 0.84% following three consecutive weeks of increases. Gold has been supported by doubts about further near-term rate hikes and a weak dollar, leading to a 9.97% gain YTD.

Bonds: The 10-year treasury yield fell slightly from 2.30% to 2.27%, resulting in positive performance for treasury and aggregate bonds.

High-yield bonds were flat as interest rates remained mostly stable and riskier asset classes were mixed.

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

Lesson to be learned: “To be a successful business owner and investor, you have to be emotionally neutral to winning and losing. Winning and losing are just part of the game.” – Rich Dad. Many investors allow emotions to guide their investment decision making process, but the most successful investors are able to take emotions out of the equation. 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 23.43, 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 mostly flat for the second consecutive week but remains firmly in the upward trend that began in mid-February 2016. Though the current rally has slowed slightly in recent months, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times this year, illustrating there may still be further gains ahead. 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

Broad equity markets finished mixed for the second consecutive week as earnings continued to roll in and investors reacted to numerous economic data reports.

We are well into Q2 2017 earnings season, and so far earnings have been moderately strong. Of the 84% of companies in the S&P 500 that have reported Q2 earnings so far, 72% have beat the average earnings estimate and 70% have beat the average sales estimate. The blended S&P 500 earnings growth rate currently stands at 10.1%, compared to the initial estimate of 6.5% on June 30 before earnings season started.

While earnings remain strong, there was a slew of economic data reported over the past week. Many of the reports exhibited mixed signals for investors, but broad equity markets ended the week on a positive note as the employment report released on Friday showed there were 209,000 jobs added in July compared to the expected 185,000. As job growth continued its positive momentum the unemployment rate fell from 4.4% to 4.3%, matching its lowest level since 2001 for the second time this year.

While the economy seems stable at the moment, 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. It is crucial not to chase returns just because a stock is “hot” at the moment.

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