Federal Reserve Chair Janet Yellen Gives Speech About US Economy

Monday, August 29, 2016 | Leave a comment

5-Minute Market Update  |  August 29, 2016

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 negative for the week as only small cap US stocks experienced gains. Most S&P 500 sectors saw negative performance, with defensive sectors suffering the largest losses.

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

Commodities: Commodities were negative for the week as oil fell 1.81%. Oil prices still remain well below the high year-to-date levels seen in the beginning of June. Gold dropped 1.41% for the week, but remains considerably positive for the year.

Bonds: The 10-year treasury yield increased slightly from 1.58% to 1.62%, leading to negative performance in treasury and aggregate bonds.

High yield bonds were flat as a decrease in credit spreads helped offset the broad interest rate increase.

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 ended negative after a volatile week of trading, keeping prices within the narrow trading range experienced over the past few weeks. Since the S&P 500 broke through the ceiling set back in May 2015, prices seem to have stalled as there has not been a definitive move up or down. Over the next few weeks we would like to see increasing volume accompanying 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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Markets became more cautions during the week as investors waited for Federal Reserve chair Janet Yellen to speak at the annual Economic Symposium in Jackson Hole, Wyoming.

Yellen stated the case for raising interest rates has strengthened recently, but there is still little guidance about the timing of such a decision. This was in line with what the markets expected, but other committee members hinted there may be rate hikes sooner rather than later.

The uncertainty surrounding the speeches on Friday helped illustrate how fragile the markets can be. The S&P 500 fell over 1% due to the fear of sooner than expected rate hikes, but pared some of the losses at the end of the day with the relief that rate hikes may still be in the distant future. Increasing rates could be a sign that the U.S. economy is showing strong growth and seems healthy, but many investors fear this could cause more harm than good in the equity markets. A tightening monetary policy would reduce liquidity in the financial markets, potentially pushing money from riskier assets to safe-haven assets.

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.

*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.

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