Darrell Bryant Retirement Blog

Thursday, September 7, 2017

5-Minute Market Update | September 5, 2017

By Darrell Bryant

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 small-cap US stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive as cyclical sectors generally outperformed defensive 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 positive for the week, though oil prices fell 1.21%. Oil prices have been volatile so far in 2017 as the positive effects of strengthening demand have been conflicting with the negative effects of high global supply. Recent sentiment towards oil remains bearish amid fears the OPEC supply cuts may fall apart as countries continue to fall short of the pledged reductions. Gold prices rose 2.50% and remain positive with a 15.34% gain YTD amid various political uncertainties.


Bonds: The 10-year treasury yield fell slightly from 2.17% to 2.16%, resulting in mostly flat performance for treasury and aggregate bonds.

High-yield bonds were positive as credit spreads tightened and riskier asset classes performed well 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 positive for the second consecutive week and 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, though the Index is back above its three-month moving average after recently closing below it for the first time since April. 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. 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 positive for the second consecutive week as economic data remains mostly positive and a renewed optimism for tax reform remains in place.


The second estimate of Q2 2017 GDP revealed the US economy grew by an estimated 3.0% on an annualized basis – a notable acceleration from the lethargic 1.2% reported in Q1 earlier this year. This number was upwardly revised from the initial growth estimate of 2.6% and represents the strongest quarterly expansion since Q2 2015. A major contributor to the stronger economic growth was an increase in consumer spending as consumers are benefiting from a strong job market and credit remains easily accessible.


While job growth in August was slightly disappointing, with a payroll increase of only 156,000 compared to the estimate of 185,000, the labor market remains healthy. Unemployment is still near its lowest level since 2001 (currently sitting at 4.4%) and the labor force participation rate remained steady. Also, August payroll numbers are often revised higher due to a relatively low response rate by employers taking vacations before the school year starts, so the weakness may be temporary and the data could be shifted higher next month.


The mostly positive economic data, combined with the rejuvenated optimism regarding tax reform, helped offset geopolitical concerns for the moment. Relations between the US and North Korea remain tense as North Korea fired a missile over Japan into the Pacific Ocean early Tuesday morning. This test was seen as a direct challenge to President Trump, similar to when North Korea launched rockets over Japan at the beginning of the Obama administration in 2009. While it still seems unlikely anything will actually materialize from the recent events, the persistent political tensions have introduced a higher level of volatility into US stock markets and pushed US treasury yields lower as investors have increased exposure to safe-haven asset classes. However, history shows us that geopolitical risks generally dissipate after short periods of time while broader fundamentals drive the markets over the longer term, so these trends may reverse if tensions ease over the coming months.


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.




Derek Prusa, CFA, CFP®
Senior Market Analyst