5-Minute Market Update | November 20, 2017
Equities: Broad equity markets finished the week mixed as small-cap US stocks experienced the largest gains and international stocks experienced the largest losses. S&P 500 sectors finished the week mixed with no discernable difference between cyclical and defensive sectors.
So far in 2017 technology, healthcare, and materials are the strongest performers while energy and telecommunications are the only sectors with negative performance year-to-date.
Commodities: Commodities were negative for the week as oil prices fell 0.33%, marking the first decline in six weeks. While oil prices remain near the recent two-year high levels, concerns have been growing over Russias support for extending production cuts. Gold prices increased 1.75% as the US dollar weakened for the second consecutive week, helping gold to remain modestly positive with a 12.74% gain YTD.
Bonds: The 10-year treasury yield fell from 2.40% to 2.35%, resulting in positive performance for treasury and aggregate bonds. Yields have been trending up since early September, but have subsided since President Trump nominated current Fed Governor Jermoe Powell as the next Federal Reserve Chair in early November. Powells views on raising interest rates are similar to current Fed Chair Janet Yellen investors expect a slow-and-steady path of rate increases over the coming year with the nomination.
High-yield bonds were positive as credit spreads leveled-off following the spike higher in recent weeks. If the economy remains strong and healthy, higher-yielding bonds are expected to continue outperforming aggregate bonds as they offer higher interest payments and the risk of default is moderately low.
All indices are currently positive in 2017, with equity markets leading the way while commodities and bonds lag behind.
Lesson to be learned: It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, youll do things differently. Warren Buffett. Sadly, the same can be said about your portfolio (see global stock markets in 2008). However, by keeping a smart and disciplined investment strategy and maintaining a broadly diversified blend of assets, you can improve your probability of long-term success and minimize the negative impacts that extreme bear markets can have on your financial well-being.
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 19.40, 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 slightly negative for the second consecutive week, following a streak of eight consecutive weeks of gains (the longest weekly winning streak since 2006). However, the Index remains firmly in the upward trend that began in mid-February 2016. Shorter-term momentum has continued in recent months as the Index has continued to reach new all-time highs, illustrating there may still be further gains ahead. While volatility and downward pressure had slightly increased, stock markets are still in a historically low risk and volatility environment as there has not been a 5%+ correction for the S&P 500 in 353 trading days the fourth longest streak in the history of the Index. 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
US stocks finished the week mixed as investors look forward to the holiday season.
Large-cap US stock indices were slightly negative for the week while smaller-cap US stock indices experienced modest gains. While there were no major movements throughout the week, the S&P 500 broke a 50-day streak of avoiding a daily decline of greater than 0.50% (the Index fell just 0.55% on Wednesday). This was the longest stretch without a 0.50% daily loss since 1965, reaffirming the trend of extremely low volatility in the US stock markets so far in 2017.
As broad markets were somewhat mixed, US retail sales data was stronger than expected for October and revised upward for September. Though the 0.2% growth rate experienced was not much higher than the 0.1% expectation, the recent string of positive sales data could bode well for retailers heading into the holiday shopping season. With the labor market remaining healthy and consumer sentiment strong, sales could increase through the end of the year as shoppers feel comfortable and confident about spending their money. All things equal, higher sales and consumer spending would help boost broad US economic growth.
Though markets remain in an upward trend, it is important to remember the future is largely independent of the past. Broad US stocks have been experiencing strong gains with minimal volatility and virtually no drawdowns so far in 2017. In this environment, it can be easy to forget there are risks to investing. However, it was less than two years ago (at the beginning of 2016) when the US stock market experienced the worst start to a year in recorded history. This is why it is still important to include a broad range of asset classes in your portfolio for more consistent and more stable longer-term results, rather than chasing hot short-term returns.
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