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 positive with international 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, 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 slightly negative for the week as oil prices fell 0.58%. Oil prices had experienced some recent upward pressure on news of support for a potential OPEC production cut extension, but renewed concerns that higher US production will impede OPEC’s attempts to reduce global supply has pushed prices lower in recent weeks. Gold prices fell 1.61% for the week but remain positive at +10.29% for the year.
Bonds: The 10-year treasury yield increased from 2.24% to 2.29%, resulting in slightly negative performance for treasury and aggregate bonds.
High yield bonds were positive as risky assets performed well and credit spreads fell slightly.
Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.
Lesson to be learned: Paul Samuelson once said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Proper investing requires a large amount of patience, which can be difficult for many investors to maintain at times. However, if you create and stick to a disciplined investment strategy, the gains you see over time will become exciting in the long-term.
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 and remains well above the support level that was set following the breakout in July last year. 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 so far this year. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems to remain in a bullish pattern for now.
Global stock markets breathed a sigh of relief and finished positive last week as the first round of the French election went as many investors hoped.
France held the first round of voting for its presidential election on April 23. The top two candidates from the initial field, Emmanuel Macron and Marine Le Pen, will now face off in the final round of voting on May 7. Recent opinion polls suggest Macron will take 65% of the head-to-head vote. Le Pen is in support of France exiting the European Union and anti-immigration policies, which could lead to additional political turmoil in Europe if she is elected, but a large amount of investor anxiety was focused on the first round of voting (there was more uncertainty about the results in the first round as numerous candidates competed in a free for all).
Helping support stock markets, a brief summary of Trump’s tax plan was released on Wednesday. Though the tax reform outline did not have enough detail to calculate its overall economic impact, some specific numbers were given. The outline calls for the corporate tax rate to be sharply cut (from 35% to 15%), a simpler tax code reducing the number of tax brackets for individuals from seven to three (with levels of 10%, 25%, and 35%), and increases in standard deductions (from $6,350 to $12,700). There are still numerous details that need to be worked out, but the release of this outline has increased optimism about a tax reform in the somewhat near future.
Stocks had 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