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 as small-cap US stocks experienced the largest gains. All S&P 500 sectors were positive for the week with with cyclical sectors outperforming defensive sectors.
So far in 2018 technology, consumer discretionary, and financials are the strongest performers while real estate, energy, and utilities have been the worst performing sectors.
Commodities: Commodities were positive as oil prices rose 1.29%. Oil prices have been in an upward trend since mid-2017, largely supported by falling US inventories and continued OPEC production cuts.
Gold prices were mostly flat with a 0.05% gain for the week as the dollar index steadied. The metal has experienced some downward pressure in recent weeks, but is still positive for the year.
Bonds: The 10-year treasury yield increased from 2.86% to 2.90%, remaining near its highest level since the beginning of 2014. As yields increased, traditional US bond asset classes were slightly negative. Bond prices and interest rates move inversely, so higher rates generally lead to lower prices.
High-yield bonds were positive for the week as broad riskier asset classes experienced upward pressure, offsetting the negative impact of higher interest rates. If the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds as the risk of default is moderately low.
All equity asset class indices are currently positive in 2018 while bonds asset class indices are currently negative.
Lesson to be learned: “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers. Short-term market corrections can be unnerving, but they are an inevitable part of investing and are often short-lived in relation to a longer-term bull market trend. However, there are certain times where these market corrections can turn into a prolonged bear market (such as 2008). This is why it is important to maintain a disciplined investment strategy focused on longer-term market tendencies rather than focusing on the daily market noise.
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 21.12, 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 as the Index has now experienced a weekly move of 2% or more in six of the past seven weeks (for comparison, there was only one such week with over a 2% Index move in all of 2017). While shorter-term momentum has pushed the S&P 500 lower, longer-term momentum remains intact as the Index remains in the trading range that has been in place over the past two years. The index tested the lower bounds of this trading range (which is inline with the 200-day simple moving average) a few weeks ago, but seemed to find support and has rallied off its lowest levels. This illustrates there may be support for a continued longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.
*Chart created at StockCharts.com
Broad equity markets rallied as tariff jitters eased and job growth surged.
On Thursday, President Trump stated the recently announced steel and aluminum tariffs would exclude imports from Canada and Mexico. Trump said he is also open to negotiations with other countries and regions in which the US has a strong relationship – specifically the European Union. This sent stocks higher as tensions surrounding the tariffs somewhat decreased. The newly enacted tariffs, which essentially impose a 25% tax on steel and a 10% tax on aluminum imported to the US, are to go into effect on March 23.
As the positive news regarding the tariffs pushed markets higher on Thursday, the rally continued on Friday following a strong employment report. According to the report, payrolls soared in February as the labor market added 313,000 jobs compared to the expected gain of 200,000. This huge gain in jobs illustrates even though the labor market is in its ninth year of steady expansion, there is still room to grow before “full employment” is reached. The unemployment rate remained at 4.1%, its lowest level since December 2000, while the labor force participation rate increased from 62.7% to 63%.
Though shorter-term market momentum has been volatile and somewhat negative, the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong. Even in the strongest of bull markets, stocks will not rise every day / week / month, and periodic pullbacks should be expected. These shorter-term pullbacks can even be considered healthy for the continuation of a longer-term bull market.
Short-term market corrections are only a small blip on the radar for long-term investors. However, economic data and market sentiment can change quickly. 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 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