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 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 positive for week as oil prices rose 8.61%, the largest weekly gain so far in 2017. This sharp increase follows reports showing US oil and gasoline inventories fell more than expected and Saudi Arabia announcing it would further reduce output in August. However, oil prices remain volatile and many experts do not expect the recent gains to last. Gold prices rose 1.08%, marking the third consecutive week of gains. Gold had faced some recent downward pressure, but investors continue to have doubts about further near-term rate hikes, adding support to gold.
Bonds: The 10-year treasury yield increased from 2.24% to 2.30%, resulting in negative performance for treasury and aggregate bonds.
High-yield bonds were positive as credit spreads tightened and most riskier asset classes performed well for the week.
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.
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 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.
Broad equity markets finished the week mixed as the Fed announced it would leave interest rates unchanged.
The Federal Open Market Committee (FOMC) announced it would leave the target federal funds rate unchanged at a range of 1.00% – 1.25%. Though this was the expected outcome and the meeting seemed somewhat uneventful on the surface, the FOMC did provide some hints regarding the path of monetary policy through the end of 2017.
In her statement following the two-day meeting, Fed Chair Janet Yellen said the economy is expected to warrant gradual increases in rates going forward. Most Fed officials expect one more rate hike before the end of the year. Beyond increasing interest rates, central bankers said they expect to begin the process of shrinking its $4.5 trillion balance sheet “relatively soon,” leading many investors to believe the unwinding will begin in October (following the next Fed meeting in late September).
If the Fed begins to unwind the balance sheet this year, it would likely result in a steepening of the yield curve (longer-term interest rates such as 10-year treasury yields increasing faster than shorter term interest rates). While rising interest rates generally adds downward pressure to the economy and equity markets, with the slow and steady expected pace of monetary tightening there should be room for further growth as long as economic data remains strong.
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