5-Minute Market Update | November 21, 2016
I am happy to present this weeks 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 mostly positive for the week with small-cap stocks experiencing the largest gains. S&P 500 sectors finished the week mixed with cyclical sectors generally outperforming defensive sectors.
So far in 2016 energy, financials, and industrials are the strongest performers while healthcare and consumer staples are the only sectors with negative performance year-to-date.
Commodities: Commodities were positive for the week as oil gained 5.25%. Oil prices had decreased 14.63% over the previous three weeks on speculation of an increase in global production. Gold fell 1.23%, its first decline in five weeks, but remains considerably positive at +13.98% for the year.
Bonds: The 10-year treasury yield increased sharply from 2.15% to 2.34% as investors continued speculation of faster US growth and higher inflation following Trumps presidential election victory, leading to negative performance in treasury and aggregate bonds.
High yield bonds were positive as the increase in broad interest rates was negated by the positive effect of riskier asset gains.
Most indices remain positive (modestly) for 2016, with small-cap stocks leading the way.
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.
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, Ill 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).
Weekly Comments & Charts
The S&P 500 finished positive for the week and remained above the support level that was set following the breakout in July. Prior to last week, the S&P 500 had closed negative in four of five weeks, but markets rebounded sharply following the presidential election results. Thus, we remain at an important inflection point in the equity markets. If the S&P 500 turns this level of support back into a level of resistance, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. However, if the index maintains its positive momentum and reaches a new all time high, it could signal a more definitive continuation of the bull market conditions experienced since early 2009. The coming weeks, especially now that the election has passed, should give some valuable insight about the near-term direction of the S&P 500.
US equity markets finished positive for the second straight week as stocks continued to rally following the election.
Small-cap US stocks have lead the way following the election, experiencing gains of over 10%. The S&P 500 is up over 2% since the election and is just below its all time high. This is positive news for US stocks as investors speculate about how Trumps policies may lead to stronger economic growth, but how have other major asset classes been performing post-election?
Emerging markets have declined over 7% as many investors fear rising tariffs and a more-strict trade policy between the US and other countries could damage the economic health of these countries. Developed international stocks are down over 2% with continuing uncertainty surrounding the Eurozone. Real estate is down over 2% and 20-year treasuries are down over 7% as interest rates continue to climb.
Though it may be tempting to make portfolio changes based on these short-term trends, it is important to maintain a disciplined investment policy. US stocks have been performing extremely well relative to other markets since 2009, but this will likely not be the case forever. It is important not to lose sight of other asset classes. Every market cycle will have asset classes that outperform and asset classes that underperform; including a broad group of asset classes in your portfolio can lead to lower risk and more consistent returns over the long-run.
While market trends and history are useful for study, theres 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.