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 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 2.38%, dropping below $45/bbl for the first time since November and marking the fourth consecutive week of losses. 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. Gold prices fell 1.17% for the week, but gold remains moderately positive (+9.26%) for the year.

Bonds: The 10-year treasury yield fell from 2.21% to 2.16%, resulting in positive performance for treasury and aggregate bonds.

High-yield bonds were slightly negative as credit spreads increased and risky assets were mixed 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: “Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer. It can be easy to spot the moments of “market stupidity” in hindsight, but it is not always so clear at the time they are happening. As investors, we need to be prepared for the unexpected so we do not get caught up in the irrationalities the markets so often display. 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 8.94, 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 marginally positive, though it just missed reaching what would have been new record highs for the sixth consecutive week. Though the current rally has slowed slightly in recent months, the Index remains in the upward trend that began in mid-February 2016. 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 stocks were mixed for the week as markets reacted to the Fed’s rate decision and inflation data.

As expected, the Federal Open Market Committee (FOMC) announced it would raise the target federal funds rate by 0.25%, to a range of 1.00% – 1.25%. This is the third rate hike in the last six months, but only the fourth since the 2008 financial crisis. According to the “dot plot” the FOMC expects one more rate hike this year and three more in 2018, inline with the initial projections heading into 2017. However, market participants are not quite as confident in another 2017 rate hike as the implied probability for higher rates by year-end according to the CME Group currently stands at only 39.9%.

The lack of investors confidence in higher rates by the end of 2017 can partially be attributed to the recent disappointing inflation data. It was reported on Wednesday that US consumer prices fell 0.1% for May, coming in weaker than consensus expectations. Though this soft data did not deter the Fed from raising rates in June, the broad weakness in inflation over the past few months has reduced the outlook for another rate hike before the end of 2017. The Fed hopes to continue raising rates as scheduled, but could face a delay in future rate hikes if inflation does not reaccelerate in the coming months.

In general, rising interest rates is thought to add downward pressure to the economy and equity markets. However, with the slow and steady expected pace of rate hikes, the current rising rate environment seems to be designed more to bring rates toward “normal” levels than to slow down the economy. As long as the economy remains relatively healthy, there is room for increasing interest rates as well as an ongoing bull market for stocks in the US.

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 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.

Regards,

Derek Prusa, CFA, CFP®
Senior Market Analyst