5-Minute Market Update | January 9, 2017

Posted January 9, 2017

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 positive for the week with international equities experiencing the largest gains. Most S&P 500 sectors finished the week positive while cyclical sectors generally outperformed defensive sectors.

So far in 2017 healthcare, technology, and consumer discretionary are the strongest performers while telecommunications is the only sector with negative performance year-to-date.

 

Commodities: Commodities were negative for the week, though oil prices increased 0.50%. Oil prices increased 45.03% in 2016 and prices seem to have stabilized from the drops experienced in 2014 & 2015. Gold prices increased 1.90%, the largest weekly gain since October 2016.

 

Bonds: The 10-year treasury yield decreased slightly from 2.45% to 2.42%, leading to positive performance in treasury and aggregate bonds. This is the third straight week rates have fallen.

High yield bonds were positive as riskier assets performed well and credit spreads continued to fall.

 

Most indices are currently positive for 2016, with international stocks leading the way.

 

screen-shot-2017-01-08-at-9-35-23-pm

 

Lesson to be learned: Benjamin Graham once said “The individual investor should act consistently as an investor and not as a speculator.” Nobody can predict the future, but it can be difficult to avoid the urge of speculating about “hot” market topics. Markets often act in ways that are unforeseen which is why it is important to maintain a smart and disciplined investment strategy while avoiding knee-jerk reactions based on daily market noise.

 

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).

 

screen-shot-2017-01-03-at-9-02-48-am

 

Weekly Comments & Charts

 

The S&P 500 ended the week positive and remains well above the support level that was set following the breakout in July last year. Prior to the presidential election, the S&P 500 had closed negative in four of five weeks, but the market has rebounded sharply and has reached new all time highs multiple times in recent weeks. With the recent momentum and upward price pressure, it appears that US equity markets are currently in an intermediate-term upward trend. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems the sideways/downward pattern experienced since mid-2015 has shifted to a more bullish pattern for now.

 

screen-shot-2017-01-08-at-9-38-10-pm

 

US stocks began 2017 on a positive note as the S&P 500 closed at a record high and the Dow Jones Industrial Average came excruciatingly close to the psychological milestone of 20,000.

 

The Dow came within 0.37 points of hitting 20,000 on Friday, but fell just short as markets refused to continue pushing higher to end the week. Investors will have to wait a little longer to see the Dow reach this milestone, but US stock markets experienced strong gains to kickoff 2017 nonetheless.

 

Some of the gains can be attributed to the employment report released on Friday, which was largely positive even though the data may have seemed negative on the surface. The report showed the US economy added 156,000 jobs in December. This number was lower than the expected figure of 175,000, but it illustrates the labor market continues to grow at a steady pace during its seventh year of expansion.

 

The unemployment rate increased from 4.6% to 4.7%, which is generally seen as unfavorable. However, the rise in unemployment was due to an increase in the labor force participation rate, which is a positive sign for the economy. Wage growth was also positive as average hourly earnings increased by 2.9% compared to a year ago – the largest year-over-year increase since 2009.

 

You have to do a little digging to find the positives in the most recent employment report, but the numbers illustrate job growth remains moderately strong, more Americans are seeking employment, and wages are growing at the fastest pace seen in years. The labor market will need to continue this positive trend if US stocks are going to continue the recent positive trend through 2017.

 

While market trends and history are useful for study, there’s always more to investing than just the charts and trends.

 

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

*Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.