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 mostly 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 negative for the week as oil prices fell 6.30%. 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 have pushed prices lower in recent weeks. Gold prices fell 3.26% for the week but remain moderately positive for the year.
Bonds: The 10-year treasury yield increased from 2.29% to 2.36%, resulting in negative performance for treasury and aggregate bonds.
High yield bonds were slightly negative as the positive performance in risky assets was offset by increases in credit spreads and broad interest rates.
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.
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.
US stocks finished mostly positive during a busy week of news for the markets and economy.
On Wednesday, the Federal Reserve announced it would keep the target federal funds rate unchanged at a range of 0.75% – 1.00%. This was the expected decision as the Fed increased rates following its most recent meeting in March, but the Fed remained optimistic about staying course for two more rate hikes before the end of 2017 despite softer than expected data in the first quarter. The implied probability for a rate hike in June currently stands at 83% according to the CME Group’s 30-Day Fed Fund futures prices.
Following the Fed meeting, the House of Representatives passed a new health care bill seeking to replace the Affordable Care Act (Obamacare) on Thursday. Some of the major points of the bill include repealing the individual mandate requiring health insurance and replacing subsidies with tax credits. Though there is still a lot of work to be done before there is a final bill that will become law, this was an important step forward for the Trump administration’s new policies. Now that the House has passed a bill, the likely next step is the Senate writing its own health care bill to be placed to a vote.
Concluding the busy week, it was reported on Friday the economy added 211,000 jobs in April – beating the expectation of 185,000 jobs. This data helps support the view that the weakness in the March employment report was mostly attributable to factors such as weather and not a slowdown in labor market growth. Accompanying strong job gains, the unemployment rate fell from 4.5% to 4.4%, which is the lowest level since May 2007.
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