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 mostly negative with small-cap US stocks experiencing the largest losses and international stocks experiencing the only gains. S&P 500 sectors finished the week mostly negative as defensive sectors generally outperformed cyclical sectors.

So far in 2017 technology, healthcare, and utilities are the strongest performers while energy and telecommunications are the only sectors with negative performance year-to-date.

 

Commodities: Commodities were mostly flat for the week as oil prices rose 0.40%. Oil prices had experienced six consecutive days of increases, but fell sharply (over 3%) on Friday as Hurricane Irma continued its path toward Florida, sending a bearish sentiment through investors believing demand may edge lower in the near-term while production remains unaffected. Gold prices rose 1.56% for the third consecutive week of gains and remain positive with a 16.91% gain YTD amid various political uncertainties.

 

Bonds: The 10-year treasury yield fell from 2.16% to 2.06%, resulting in positive performance for treasury and aggregate bonds. This marks the lowest level longer-term bond yields have reached since the election last November, even though there have been three Fed rate hikes over this period (illustrating a significant flattening of the yield curve in recent months).

High-yield bonds were negative as credit spreads slightly increased and riskier asset classes were mostly negative for the week.

 

Indices are mostly positive for 2017, with equity markets leading the way while commodities and bonds lag behind.

 

 

Lesson to be learned: “Remember that the stock market is a manic depressive.” –  Warren Buffett. Sometimes the market is sensible and prices are based on economic and business developments. However, at other times the market can be emotionally unstable, swinging from euphoria to pessimism in an instant. 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.

 

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 22.06, 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 negative for the week, but remains firmly in the upward trend that began in mid-February 2016. While intermediate and long-term momentum remains positive, shorter-term momentum has slowed. Many indices have reached new all time highs multiple times this year, illustrating there may still be further gains ahead, but volatility and downward pressure has slightly increased in recent months. However, 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 303 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

 

Broad US stock markets finished negative for the week as concerns surrounding Hurricane Irma and political headlines weighed on investor sentiment.

 

US equity markets, and specifically insurance companies, were dragged down last week as Hurricane Irma headed toward Florida. Hurricane Irma had ripped through the Caribbean and was expected to result in catastrophic losses throughout a large part of Florida. While damages throughout the weekend were severe and will impact many lives, the hurricane was less damaging than the “worst-case” scenario many investors expected, resulting in a more-positive sentiment for insurance companies and broad markets to start this week. Although there is a sense of relief in the markets, it is still important to note JPMorgan believes this may be among the top 5 costliest hurricanes in US history.

 

Adding to the negative sentiment for the week, President Trump agreed to a deal to increase the debt ceiling and provide funding for the government for an additional three months. While the short-term bill was easily approved by the House and Senate, there has been open criticism from notable Republicans such as John McCain and Speaker of the House Paul Ryan. Many investors fear this adds to the narrative of deteriorating relations between President Trump and other members of the Republican party, which could lead to complications in tax-reform negotiations. Trump has traveled to multiple states speaking about tax reform in recent weeks, so it will be important to keep an eye out for further specific details as more information becomes available.

 

While markets remain healthy, the recent increase in volatility and political risks reminds us why it is important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results. Individual stocks, sectors, and indices can go from periods of over-performance to under-performance without a moments notice.

 

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.

 

Regards,

 

Derek Prusa, CFA, CFP®
Senior Market Analyst