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 with large-cap US stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive as defensive sectors generally outperformed cyclical sectors.
So far in 2017 technology, consumer discretionary, and healthcare 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 1.05%. Oil prices had been trending upward following a report showing falling US crude oil inventories on May 10, but prices dropped almost 5% on Thursday on disappointment that the extension of OPEC output cuts did not go deeper (investors were hoping for an even lower level of production rather than simply the extension of current output cuts). Gold prices rose 1.16% for the week as gold remains moderately positive for the year.
Bonds: The 10-year treasury yield increased slightly from 2.23% to 2.25%, resulting in mostly flat performance for treasury and aggregate bonds.
High yield bonds were positive as riskier asset classes performed well during the week.
Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.
Lesson to be learned: “Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer. It can be easy to spot the moments of “market stupidity” in hindsight, but it is not always so clear at the time they are happening. As investors, we need to be prepared for the unexpected so we do not get caught up in the irrationalities the markets so often display. By sticking to a disciplined investment strategy you can minimize the effect that emotions can have on your portfolio, improving your chances for long-term portfolio success.
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 positive after reaching new record highs and remains in the upward trend that began in mid-February 2016. Though the current rally has slowed in recent months, short and intermediate-term momentum remains positive as many indices have reached new all time highs multiple times in recent months. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems to remain in a bullish pattern for now.
Investors continued to shrug off recent political concerns as focus was turned to corporate earnings, GDP growth, and commentary from the Federal Reserve.
Approximately 98% of companies in the S&P 500 have reported earnings for Q1 2017. Of the companies that have already reported, 75% achieved earnings above the average estimate and 64% achieved sales above the average estimate. The total blended S&P 500 earnings growth rate is now 13.9% for the quarter compared to Q1 2016, higher than the initial 9.0% growth estimate before earnings season began.
As corporate earnings continued to come in stronger than expected, Q1 2017 GDP growth was revised upward from 0.7% to 1.2%. Though this is still well below the 2.1% growth in Q4 2016, many indicators currently point to economic strength and it is typical for first quarter GDP to be weak with stronger performances in the second and third quarters.
In response to the relatively strong economy, the Federal Open Market Committee indicated it may soon begin the process of unwinding its balance sheet. The Fed is currently holding a $4.5 trillion portfolio of mostly government debt accumulated in the years following the financial crisis of 2008, with the goal of reducing this to around $2.5 trillion over several years. The Fed has used this balance sheet to keep interest rates low and the economy moving higher since the crisis. Though rates are expected to remain relatively low in the foreseeable future, it seems we are finally moving toward the end of the nine-year economic stimulus plan, and into a more normalized interest rate environment
Stocks have been performing well since the US presidential election with minimal volatility and virtually no drawdowns, but it is important to remember to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results.
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.