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 flat-to-negative with large-cap US stocks experiencing the largest losses. S&P 500 sectors finished the week mostly negative 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 the first time in six weeks as oil prices increased 7.04%. Rising production in the United States, Nigeria, and Libya, coupled with faltering demand in Asia, has offset OPEC’s attempt to support prices by cutting output. However, oil prices bucked the recent negative trend after data showed gasoline stockpiles fell more than expected. Gold prices fell 1.12% for the week, but gold remains moderately positive (+8.03%) for the year.

Bonds: The 10-year treasury yield increased from 2.15% to 2.31% as investors speculated global central banks are getting ready to raise rates, resulting in negative performance for treasury and aggregate bonds.

High-yield bonds were positive as credit spreads narrowed 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 negative 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 the week flat-to-negative as financial stocks soared and technology stocks continued to weigh on the market.

Last week, the Federal Reserve announced the results of its stress test for US banks, which determine whether banks are financially strong enough to weather a severe recession. For the first time in seven years of testing, all 34 banks that were tested passed and were granted permission to increase dividends and buy back stock shares. These results sent the financial sector soaring as many analysts expect positive news for many banks.

As bank stocks experienced strong gains, the technology sector continued to falter as investors remain concerned large tech companies such as Apple and Google may be overvalued. Since June 9, when Goldman Sachs published an article about the high valuations of large tech companies, the technology sector has fallen over 4.5% and has been the worst performing sector in the S&P 500.

This is a significant reversal from the first five months of the year where technology was by far the best performing S&P sector (+19.67%) while financials was one of the only three negative sectors (-0.33%). With technology as the largest weighted sector in the S&P 500, making up approximately 22.3% of the index, this trend has created a drag on broad market returns over the past month.

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