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 negative as international stocks experienced the only gains. S&P 500 sectors finished the week mostly negative with no discernable difference between cyclical and defensive sectors.
So far in 2017 technology, healthcare, and consumer discretionary are the strongest performers while energy, telecommunications, and real estate are the only sectors with negative performance year-to-date.
Commodities: Commodities were negative for the week as oil prices fell 9.08% following a report that US inventories rose more than expected. This marks the largest one-week drop since October as investors fear the recent OPEC production cuts may not be enough to reverse the global glut of crude oil. Gold prices fell for the second consecutive weeks, posting a 2.02% loss, though gold is still moderately positive for the year.
Bonds: The 10-year treasury yield increased from 2.49% to 2.58%, resulting in losses for treasury and aggregate bonds.
High yield bonds were negative as credit spreads increased sharply during the week.
Indices are currently mixed for 2017, with equity markets leading the way while commodities and bonds lag behind.
Lesson to be learned: Fred Schwed Jr. once said “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” It can be difficult to avoid the urge of speculating about “hot” stock tips which can allegedly make you rich overnight. The truth, however, is markets often act in ways that are unforeseen. This is why it is important to maintain a smart and disciplined investment strategy while avoiding knee-jerk reactions based on 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 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 slightly negative, but remains well above the support level that was set following the breakout in July last year. Though the index has hit the pause button on the recent rally, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times in recent weeks. 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 from 2015 through mid-2016 has shifted to a more bullish pattern for now.
US stock markets experienced losses for the first week since mid-January, snapping a streak of six consecutive weeks of broad market gains.
A major contributor to the negative returns was the losses experienced by the energy sector. Oil prices traded mostly flat at the beginning of the week, but fell sharply after the Energy Information Administration reported a ninth straight weekly rise in US crude stockpiles. The report released on Wednesday showed US oil inventories rising by 8.2 million barrels, far surpassing the expected 1.3 million increase. Speculators fear higher US output could deter OPEC producers from extending production cuts, leading to new price wars for oil.
Though equities were slightly negative following the disappointing oil report, the week ended on a more positive note as the US jobs report released on Friday was stronger than expected. Payrolls increased by 235,000, above the expectation of 190,000. As jobs experienced strong gains, the unemployment rate fell from 4.8% to 4.7% while the labor force participation rate increased slightly. This shows more people are searching for, and actually finding jobs, pointing to a moderately strong economy.
The healthy labor market has provided additional support for the Fed to further raise rates. The Federal Open Market Committee will hold its next meeting this week and will release a statement regarding rates on March 15. According to the CME Group, there is a 95.2% implied probability that the Fed will decide to increase interest rates following this upcoming meeting.
Though US stocks appear to be on track to continue performing strongly for the near future, it is important to include other broad asset classes in your portfolio for more consistent, more stable longer-term results.
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.
Derek Prusa, CFA, CFP®
Senior Market Analyst