Darrell Bryant Retirement Blog

Thursday, October 13, 2016

US Jobs Report Misses Expectations

By Darrell Bryant

Enjoy the latest post from Derek Prusa, Senior Market Analyst at FormulaFolios Investments.

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, finances should be simple, not complicated.

 

Market Update

 

Equities: Broad equity markets finished negative for the week with small cap US stocks experiencing the largest losses. Financials was the only S&P 500 sector to finish the week positive.

So far in 2016 energy, technology, and telecommunications are the strongest performers while healthcare is the only sector with negative performance year-to-date.

Commodities: Commodities were positive for the week as oil gained 3.25%. This is the third straight week of gains for oil as traders continue to drive up prices on OPEC and Russia production cut speculations. Gold fell sharply, losing 4.90%, but remains considerably positive (+17.79%) for the year.

Bonds: The 10-year treasury yield increased from 1.60% to 1.73%, leading to negative performance in treasury and aggregate bonds.

High yield bonds were positive as credit spreads fell sharply, negating the downward pressure from higher broad interest rates.

All indices are currently positive (modestly) for 2016, with high yield bonds leading the way.

 

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Lesson to be learned: Benjamin Graham once said “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” There is a lot of daily market “noise” that can cause unnerving volatility at times, but it is important not to let short-term speculations drive your investment decision making process. Instead, you should maintain a smart and disciplined investment strategy to improve your chances of 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 future posts, I’ll write more about how these indicators are built and why we feel they are important.

 

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) most recently increased from 22.76 to 25.46, which signaled a slightly negative shift in the US Economy. The Bull/Bear indicator is currently 33.33% bullish, 33.33% neutral, and 33.33% bearish (averaging 50% bullish and 50% bearish). This means our models remain neutral regarding the stock market direction in the near term (think <18 months).

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Weekly Comments & Charts

 

The S&P 500 finished negative for the first time in four weeks as the index failed to continue its recent positive momentum. Prices stalled during the summer as there had not been a definitive move up or down since the S&P 500 broke through the ceiling set back in May 2015, but the past few weeks have seen an increase in price movement as markets continue to speculate over interest rates and the upcoming election. This could indicate an important inflection point in the equity markets. If the S&P 500 continues to use this old ceiling as a level of support, it could signal that markets are experiencing true positive momentum and are ready to continue making new all time highs. However, if the S&P 500 falls below the ceiling, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. The coming weeks should give some valuable insight about the near-term direction of the S&P 500.

 

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Broad equity markets ended negative for the week as a weaker than expected jobs report created some downward pressure.

 

The US economy added 156,000 jobs in September, less than the expected figure of 170,000. Though this was lower than expected, the third quarter of 2016 experienced a much higher level of job gains compared to the second quarter. The labor market is currently in its seventh year of expansion and slower pace of job growth moving forward is expected, but the US labor market remains relatively healthy for the time being.

 

Further adding to the downward pressure, British Prime Minister Theresa May announced the UK will trigger Article 50 by the end of March 2017. Article 50 sets the process for the exit of a country from the European Union. Once this is invoked, the UK will have two years to negotiate new terms with EU countries before officially severing ties with the Union. This provides more clarity about when negotiations will begin, but the revamped uncertainty of how European businesses will respond moving forward could add to near-term volatility.

 

While market trends and history are useful for study, there’s always more to investing than just the charts and trends. We need to be a little cautious about increasing global uncertainties and the election that is right around the corner.

 

Most importantly, 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