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. 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 3.93%. Oil prices had experienced some support, rising 7.04% in the previous week following data showing falling gasoline stockpiles. However, oil fell almost 3% on Friday after a report showed US production increased and OPEC exports hit a 2017 high, casting doubts over efforts to reduce global supply. Gold prices fell 2.62%, marking the fifth consecutive week of losses. Gold started the year strong, but has faced some recent downward pressure due to speculation about higher interest rates and a stronger US dollar.

Bonds: The 10-year treasury yield increased from 2.31% to 2.39% as investors continued to speculate that global central banks are getting ready to raise rates, resulting in negative performance for treasury and aggregate bonds.

High-yield bonds were negative as credit spreads increased slightly.

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 the week mostly flat and 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 US stock markets finished the holiday-shortened week slightly positive as the June employment report helped equities eke out small gains.

US stocks were on track for moderate weekly losses following the private-sector jobs report on Thursday. Private-sector job gains were 158,000 compared to an expected 187,000. Though this was a relatively strong number considering the labor market has experienced over eighth consecutive years of expansion, the lower than expected gains added downward pressure to stock markets as many investors feared there would be underwhelming data for the more widely followed employment report released on Friday.

However, Friday’s employment report showed total payroll gains of 222,222, exceeding the expected figure of 180,000. This suggests even though the labor market has tightened, there may still be room for jobs to continue growing at a steady pace before reaching a full-employment level. The better than expected data pushed US equity markets higher on Friday as investors grew more confident the economy remains on healthy footing.

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