Equities Regain Momentum Following US Employment Report

Monday, August 8, 2016 | Leave a comment

A market update from Derek Prusa, CFP®, Senior Market Analyst:  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, finances should be simple, not complicated.

Market Update

Equities: Broad equity markets finished mostly positive after a moderately volatile week of trading. Most growth indices were negative going into the end of the week, but a stronger than expected US employment report on Friday helped push the markets into positive territory. S&P 500 sectors finished the week mixed with cyclical sectors generally performing the best.

So far in 2016 telecommunications, utilities, and energy are the strongest performers; no sectors currently have negative performance year-to-date.

Commodities: Commodities rebounded slightly in the first week of August after a considerably negative July. Oil gained 0.48%, but is still almost 19% lower than the high year-to-date levels seen in the beginning of June. Gold fell 0.93% but remains significantly positive for the year.

Bonds: The 10-year treasury yield increased slightly from 1.46% to 1.51%, leading to negative performance in treasury and aggregate bonds.

High yield bonds were positive as credit spreads decreased for the week. Credit spreads had been inching higher through the first part of the week putting downward pressure on high yield debt, but a market shift into riskier assets at week end reversed the momentum.

Most indices remain positive (modestly) for 2016, with high yield bonds leading the way.

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Lesson to be learned: Warren Buffett once said “the stock market is a device for transferring money from the impatient to the patient.” Impatient investors allow emotions to guide their decisions, often leading to self-destructive portfolio behavior. This is why is is important to remain patient. Maintaining a smart and disciplined investment strategy will improve your chances of long term portfolio success.

FFI Indicators

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, I’ll 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 decreased from 29.8 to 25.33, which signaled a slightly positive 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).

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Weekly Comments & Charts

The S&P 500 continued its recent positive price momentum last week but did so, once again, on low volume compared to the rest of 2016. Though prices have been trending up recently, trading volume (the number of shares traded during a specified period of time) has been in a slow decline since the beginning of the year. When prices increase and volume decreases, it can be a warning of a potential reversal due to a lack of interest in the market. Price increases (or decreases) on weak volume is not necessarily a strong signal. We would like to see increasing volume accompanying the increasing prices. This would signal that the momentum has officially shifted to a more positive outlook. The coming weeks should give some valuable insight about whether the S&P 500 will turn the old level of resistance into a level of support or if the markets pull back again and retreat into the sideways/downward trading pattern.

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US equity indices were negative for the week going into Friday, but a stronger than expected employment report helped stocks to finish the week positive. Total payroll employment rose by 255,000 in July, compared to an expected 175,000. Though jobs increased more than expected, the unemployment rate remained at 4.9% as more workers began to participate in the job market. The strong job numbers brought a wave of relief to the markets at the end the week following a lackluster Q2 2016 GDP report. Employment has been strong (excluding May) in 2016, but the recent stall in unemployment rate declines suggests we may be in a mature stage of the labor market in which the recent large gains would not be expected to continue in the future.

While economic data remains mixed, Q2 2016 earnings have been better than expected. So far, 86% of companies in the S&P 500 have reported earnings. Of these companies, 69% have beat earnings estimates and 54% have beat sales estimates. This is positive news for most companies, but the blended earnings decline for Q2 2016 is still -3.5% (before companies began reporting, the estimate was a decline of -5.5%). If total S&P 500 earnings do finish negative for Q2 2016, it will mark the first time the index has recorded five consecutive quarters of year-over-year earnings declines since Q3 2008 through Q3 2009.

While market trends and history are useful for study, there’s always more to investing than just the charts and trends. We need to be a little cautious about increasing global uncertainties and the election that is right around the corner.

Most importantly, 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.

Regards,

Derek Prusa, CFP®
Senior Market Analyst

 

Derek has passed all three levels of the CFA® Program and may be awarded the charter upon completion of the required work experience.

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