5-Minute Market Update | December 5, 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 negative for the week week with small-cap stocks experiencing the largest losses. S&P 500 sectors finished the week mixed with no discernible difference between cyclical and defensive sectors.
So far in 2016 energy, industrials, and financials 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 12.20%. Oil prices spiked following OPECs announcement that a decision was reached to cut output starting in January 2017. Gold fell 0.26% but remains considerably positive at +10.83% for the year.
Bonds: The 10-year treasury yield increased slightly from 2.36% to 2.40%, but treasury and aggregate bonds ended the week mostly flat after experiencing three straight weeks of losses.
High yield bonds were flat as well due to a decline in credit spreads offsetting rising broad interest rates.
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 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 first time since the election, but remains 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 mostly negative as stocks took a break from the recent rally we have experienced following the election. Though the past week did not see positive market returns, there was some positive economic data released throughout the week.
The US labor market continued to expand at a strong pace and the unemployment rate dropped to 4.6%, its lowest level since August 2007. This is a generally positive sign for the US economy, though there is some cause for concern within the unemployment number. The participation rate in the labor force fell slightly as more workers have become discouraged and stopped looking for jobs, but all-in-all November was still a positive month for employment data.
US GDP grew by an estimated 3.2% during the third quarter of 2016 which is the fastest pace in two years. This estimate is higher than the initial 2.9% preliminary estimate released in October as consumer spending was revised upward.
These economic indicators illustrate there may be more gains ahead for the US equity markets, though the investment landscape can change quickly. With the presidential election past, the main focus of the markets will turn to the next Fed rate decision on December 14. According to the Chicago Board of Trade, there is a 93% implied probability that the Fed will decide to increase interest rates before the end of 2016.
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