5-Minute Market Update | March 19, 2018
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, investing should be simple, not complicated.
Equities: Broad equity markets finished the week negative as large-cap US stocks experienced the largest losses. S&P 500 sectors were mostly negative for the week with defensive sectors outperforming cyclical sectors.
So far in 2018 technology, consumer discretionary, and financials are the strongest performers while telecommunications, energy, and consumer staples have been the worst performing sectors.
Commodities: Commodities were flat as oil prices fell 0.22%. While the longer-term trend of oil prices has been positive, largely supported by OPEC production cuts, momentum has slowed in recent weeks due to concerns about rising US output.
Gold prices were negative with a 0.88% loss as the dollar index rose for the fourth consecutive week. The metal has experienced some downward pressure in recent weeks, but is still flat for the year.
Bonds: The 10-year treasury yield decreased from 2.90% to 2.85%, but remains near its highest level since the beginning of 2014. As yields fell, traditional US bond asset classes were positive. Bond prices and interest rates move inversely, so lower rates generally lead to higher prices.
High-yield bonds were negative for the week as broad riskier asset classes experienced downward pressure, offsetting the positive impact of lower interest rates. However, if the economy remains healthy, higher-yielding bonds are expected to continue outperforming traditional bonds as the risk of default is moderately low.
All equity asset class indices are currently positive in 2018 while bonds asset class indices are currently negative.
Lesson to be learned: “Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers. Short-term market corrections can be unnerving, but they are an inevitable part of investing and are often short-lived in relation to a longer-term bull market trend. However, there are certain times where these market corrections can turn into a prolonged bear market (such as 2008). This is why it is important to maintain a disciplined investment strategy focused on longer-term market tendencies rather than focusing on the daily market noise.
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 21.12, 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 negative as equity markets remain choppy. While shorter-term momentum has pushed the S&P 500 lower, longer-term momentum remains intact as the Index is still within the trading range that has been in place over the past two years. The index tested the lower bounds of this trading range (which is inline with the 200-day simple moving average) in early February, but seemed to find support and has rallied off its lowest levels. This illustrates there may be support for a continued longer-term bull market despite the shorter-term weakness. 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 long-term bullish pattern for now.
*Chart created at StockCharts.com
Broad equity markets experienced another volatile week of trading as March Madness is officially underway.
When it comes to surprises and thrills in the world of sports, the NCAA basketball tournament, dubbed March Madness, is second to none. Every year there is a plethora of upsets, with lower-ranked teams beating the heavily-favored teams. However, while many people get caught-up in the excitement of the buzzer beaters and Cinderella stories from the tournament, these low-ranked teams rarely advance past the first weekend, and the higher-ranked teams are generally crowned champions when all is said and done. In fact, there have only been three teams lower than a number four seed to win the entire tournament, while a number one seed wins about 61% of the time. So if you are looking to have the best odds of winning your bracket pool, it generally pays to favor the highest ranked teams winning in the long-term.
The same can be said for investing in financial markets. There are periods of time, such as the past few months, when markets are volatile and unpredictable in the short-term. In times like these, it can be easy to let emotions take over and to make investment decisions based on daily new headlines. However, in the longer-term it is important to ignore the daily noise and focus on the main drivers behind investment performance, such as the health of the economy and corporate earnings, rather than making knee-jerk decisions based on what is hot right now. As investors, we need to stay committed to our game plan, focusing on our long-term financial goals.
Though shorter-term market momentum has been volatile and somewhat negative, the longer-term prospects of 2018 remain mostly positive as corporate earnings and economic fundamentals remain strong.
More to come soon. Stay tuned.
Derek Prusa, CFA, CFP® Senior Market Analyst