5-Minute Market Update | November 28, 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 positive for the third straight week week with small-cap stocks experiencing the largest gains. S&P 500 sectors finished the week mostly positive as Healthcare was the only sector with negative performance.
So far in 2016 energy, industrials, and financials 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 0.81%. This is the second consecutive week of gains for oil following a three-week decrease of 14.63% on speculation of a surge in global production. Gold fell 2.51% but remains considerably positive at +11.12% for the year.
Bonds: The 10-year treasury yield increased slightly from 2.34% to 2.36% 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 well above the support level that was set following the breakout in July. Prior to the presidential election, the S&P 500 had closed negative in four of five weeks, but the market has rebounded sharply and has reached new all time highs. With the recent momentum and upward price pressure, it appears that US equity markets are currently in an intermediate-term upward trend. The coming weeks should continue to give valuable insight about the near-term direction of the S&P 500, but it seems the sideways/downward pattern experienced since mid-2015 has shifted to a more bullish pattern for now.
US equity markets finished positive for the third straight week as stocks continued to rally following the election.
Small-cap US stocks (as measured by the Russell 2000) have experienced gains in for 15 consecutive days, the longest winning streak since February 1996. Over this time period the Russell 2000 is up over 16%. Many experts believe this could be a sustainable rally over a longer-term basis as Monday saw 25% of small-cap companies hit a new 52-week high which is the highest one-day reading since 1995. This wide level of breadth generally indicates a robust expansion that can continue into the future.
Though small-cap stocks have been outperforming larger stocks, all US equity indices have experienced a strong run since the presidential election. The Dow Jones Industrial Average, the S&P 500, and the NASDAQ set new all-time highs as well this past week. This recent run-up is mostly the result of speculation surrounding Trumps policies leading to stronger US economic growth, but can it continue past the end of 2016?
So far, 98% of companies in the S&P 500 have reported earnings for Q3 2016. This will be the first time in six quarters the index has seen year-over-year growth in earnings. US GDP has also picked up momentum after a string of week data, growing at the fastest rate since Q3 2014. These are positive signs for continued US equity growth, but there are still some headwinds to be aware of. The price-to-earnings ratio for the S&P 500 is still relatively high compared to the trailing 10-year average. There is also the risk that the Fed could increase interest rates faster than expected, which could slow the current momentum in the economy. Though US stocks appear to be on track to continue outperforming through the end of 2016, it is important to include other broad asset classes in your portfolio for more consistent longer-term results.
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.