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 mostly negative with small-cap stocks experiencing the largest losses. S&P 500 sectors finished the week mostly negative 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 positive for the week as oil prices rose 5.20%. Oil prices had fallen sharply in recent weeks on renewed concerns that higher US production would impede OPEC’s attempts to reduce global supply, but prices spiked following a report showing falling US crude oil inventories on May 10 and have continued higher on growing expectations for further OPEC output cuts. Gold prices rose 2.11% for the week as gold remains moderately positive for the year.

Bonds: The 10-year treasury yield fell from 2.33% to 2.23%, resulting in positive performance for treasury and aggregate bonds.

High yield bonds were positive as the drop in broad interest rates offset the mostly negative performance in riskier asset classes.

Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.

Lesson to be learned: “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong” – George Soros. Many investors make the mistake of focusing solely on the gains in their portfolio, however it is equally as important (if not more so) to make sure your mistakes aren’t big enough to damage your portfolio beyond repair. Nobody can be right 100% of the time, but if you stick to a disciplined investment strategy that has the potential to minimize downside risk you can improve your chances of 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).

The S&P 500 finished the week negative but 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 in recent months. 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.

Broad US stock markets finished negative after a volatile week of trading.

US stocks suffered the largest pullback of 2017 on Wednesday, following news that former FBI Director James Comey stated he was asked to stop investigating former Trump National Security Adviser Michael Flynn. This news introduced some additional political risk into the markets, interrupted the recent run of optimism, and caused US stocks to slide as the S&P 500 fell over 1.75% and the Russell 2000 fell 2.70%. However, stocks shrugged off the negative news on Thursday and Friday, recovering some of the mid-week losses and finishing the week only slightly negative.

Following the sharp drawdowns on Wednesday, emerging markets took another hit on Thursday as Brazil stocks posted the worst trading day since October 2008. The Brazilian Bovespa Index was down 8.80% following news that President Michel Temer encouraged a corporate executive to pay a potential witness to remain silent in the country’s largest ever investigation into political bribery. The wide-ranging corruption scandal, known as Operation Car Wash, has been casting its shadow over Brazil since March 2014 and continues to pull in new names on a regular basis. Similar to US markets however, broad emerging market stocks recovered most of their losses on Friday to end the week only slightly negative (though Brazilian stocks still remained largely negative for the week).

Though broad stocks ended the week on a positive note relative to the large mid-week drops, the past week illustrates there may be some soft spots in the recent stock market rally. While global economic data remains mostly positive, investors have become slightly more wary regarding the various political risks and other global uncertainties surrounding the markets.

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