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 positive with international stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive as defensive sectors generally outperformed cyclical sectors.

So far in 2017 technology, consumer discretionary, and healthcare 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 4.30%. Oil prices had been trending upward following a report showing falling US crude oil inventories on May 10, but have dropped sharply again on disappointment that the extension of OPEC output cuts did not go deeper (investors were hoping for an even lower level of production rather than simply the extension of current output cuts). Gold prices rose 0.69% for the week as gold remains moderately positive for the year.

Bonds: The 10-year treasury yield fell from 2.25% to 2.15%, resulting in positive performance for treasury and aggregate bonds.

High yield bonds were positive as riskier asset classes performed well during 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 25.44, 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 positive after reaching new record highs and remains in the upward trend that began in mid-February 2016. Though the current rally has slowed in recent months, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times this year. 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 continued higher as May’s disappointing jobs report did not suppress the current level of optimism surrounding the economy.

The jobs report released on Friday showed payroll gains of only 138,000 in May compared to the expected 185,000 increase. There were also downward revisions to the March and April reports. The unemployment rate hit a 16-year low, falling to 4.3%, but this decline was mostly due to a reduction in the labor force participation rate (i.e. less people are actively searching for jobs, so less people are considered unemployed). None of this data was necessarily positive, but markets ended the week on a high note despite the short-term labor slowdown.

Many economists believe the labor market may be near full employment now. We have seen eight consecutive years of job expansion, so the large improvements from recent years may not continue going forward. However, at the moment the overall economy remains relatively healthy. Though job growth may be more gradual in the future, investors are optimistic that as long as we continue adding a moderately positive number of jobs each month (around 100,000 on average), there is still room for continued economic expansion from current levels.

Stocks have been performing well since the US presidential election with minimal volatility and virtually no drawdowns, but it is important to remember to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results.

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