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 as large-cap US stocks experienced the largest gains and international stocks experienced losses. S&P 500 sectors finished the week mostly positive as cyclical sectors generally outperformed defensive sectors.
So far in 2017 technology, healthcare, and consumer discretionary 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 1.00%. Though oil prices pulled back slightly from the recent two-year highs, sentiment remains somewhat positive as OPEC officially extended output cuts through the end of 2018 to further support prices. Gold prices fell 0.74%, though gold remains modestly positive with an 11.50% gain YTD.
Bonds: The 10-year treasury yield increased slightly from 2.34% to 2.37%, resulting in mostly flat performance for treasury and aggregate bonds. Yields have been trending up since early September, but have subsided since President Trump nominated current Fed Governor Jerome Powell as the next Federal Reserve Chair in early November. While rates have somewhat leveled off in recent weeks, many experts expect a rate hike following the December Fed meeting.
High-yield bonds were positive as credit spreads continued to level-off following the spike higher in recent weeks. If the economy remains strong and healthy, higher-yielding bonds are expected to continue outperforming aggregate bonds as they offer higher interest payments and the risk of default is moderately low.
All indices are currently positive in 2017, with equity markets leading the way while commodities and bonds lag behind.
Lesson to be learned: “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” – George Soros. The image that most people have of investing is derived from movies and television shows – investors sitting at their computers, buying and selling every day, and hooting and hollering through the entire process. However, smart investing is much different and less exciting than this. While it can be tempting to chase the next hot trend and speculate with all of your savings, it is important to keep a smart and disciplined investment strategy. By maintaining a broadly diversified blend of assets and eliminating emotions from the investment process when making decisions, you can improve your probability of long-term success and minimize the negative impacts that extreme bear markets can have on your financial well-being.
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 21.10, 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 positive for the second consecutive week, following two consecutive weeks of small losses, as the Index remains firmly in the upward trend that began in mid-February 2016. Shorter-term momentum has picked back up in recent weeks as the Index has continued to reach new all-time highs throughout 2017, illustrating there may still be further gains ahead. While volatility and downward pressure have slightly increased, stock markets are still in a historically low risk and volatility environment as there has not been a 5%+ correction for the S&P 500 in 363 trading days – the fourth longest streak in the history of the Index. 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
US stocks ended the week higher amid tax reform optimism, despite late-week politically fueled volatility.
In the early hours Saturday morning, the Senate passed its version of a tax reform bill by a 51-49 margin. Though there is still much work to be done as the House of Representatives and Senate must now reconcile their versions of the bill, this was a major hurdle to clear in the tax reform process. The Senate and House will now likely go to a conference committee as lawmakers will aim to craft a joint bill that both chambers can pass. House Majority Leader Kevin McCarthy said the Senate’s passage of the tax bill on schedule proves the overhaul can be done this year.
While markets rallied through most of the week on tax reform optimism, gains were slightly eroded on Friday as it was announced Mike Flynn, President Trump’s former national security advisor, plead guilty to lying to the FBI and may testify regarding interference in the election. At one point during trading on Friday, the S&P 500 was down over 1.5% and small-cap US stocks were down over 3%. However, markets recouped a large portion of the losses and finished the day down only modestly as investors mostly shook off the seemingly bad news.
Investors will be keenly watching how the tax reform process plays-out through the rest of 2017 as it can be a major market mover, both positively and negatively.
Though markets remain strong, it is important to remember the future is largely independent of the past. Broad US stocks have been experiencing strong gains with minimal volatility and virtually no drawdowns so far in 2017. In this environment, it can be easy to forget there are risks to investing. However, it was still less than two years ago (at the beginning of 2016) when the US stock market experienced the worst start to a year in recorded history. This is why it is still important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results, rather than chasing “hot” short-term returns.
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