5-Minute Market Update | March 6, 2017

Posted March 6, 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 the week positive with large-cap US 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, healthcare, and financials are the strongest performers while telecommunications and energy are the only sectors with negative performance year-to-date.


Commodities: Commodities were negative for the week as oil prices fell 1.22%. Though OPEC countries have achieved a higher than expected 94% compliance rate with promised production cuts (according to a Reuters survey), US oil production has increased in 2017, giving investors pause. Gold prices fell for the first time in five weeks, posting a 2.50% loss.


Bonds: The 10-year treasury yield rose from 2.31% to 2.49%, resulting in losses for treasury and aggregate bonds.

High yield bonds were positive as credit spreads remain relatively low and riskier assets performed moderately well.


Most indices are currently positive for 2017, with large-cap US stocks leading the way.


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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.


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).


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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. The most recent positive price movement snapped a narrow trading range experienced by the S&P 500, in which the Index had closed within a 1.75% range for 31 consecutive trading days. It appears that US equity markets are currently in an intermediate-term upward trend 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.


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Many US stock markets experienced gains for the sixth consecutive week as indices continue to reach new all-time highs.


US equity markets began the week mostly flat, but spiked mid-week following Trump’s first address to Congress on Tuesday. There has been a large amount of political uncertainty since the election as Trump is regarded as having an “unorthodox” presidential demeanor, but Tuesday’s speech was widely regarded as more conventional, helping to somewhat stabilize the view of the new administration.


In his speech, Trump stressed his efforts to bring more jobs back to the US and achieve goals of cutting regulations. He also recapped his goals of tax reform, both for individuals and corporations. A CNN/ORC poll showed 57% of viewers had a very positive reaction to the speech while approximately 70% of viewers felt optimistic that Trump’s proposed policies will move the country in the right direction.


The optimism following Trump’s speech is consistent with the broad level of increasing confidence in the US economy. Consumer confidence has continued to trend upward as the Conference Board Consumer Confidence Index reached its highest reading since August 2001. The primary drivers behind recent index gains have been less pessimism around business conditions and more optimism around labor market expectations.


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

*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.