Q3 2016 Earnings Season Kicks Off
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.
Equities: Broad equity markets finished negative for the week with small cap US stocks experiencing the largest losses. S&P 500 sectors finished the week mixed as defensive sectors generally outperformed cyclical sectors.
So far in 2016 energy, technology, and utilities are the strongest performers while healthcare is the only sector with negative performance year-to-date.
Commodities: Commodities were positive for the week as oil gained 1.08%. This is the fourth straight week of gains for oil as traders continue to drive up prices on OPEC and Russia production cut speculations. Gold increased 0.34% and remains considerably positive (+18.18%) for the year.
Bonds: The 10-year treasury yield increased from 1.73% to 1.80%, leading to negative performance in treasury and aggregate bonds.
High yield bonds were negative as broad interest rate increases added to losses experienced from the negative performance in riskier assets.
Most indices remain positive (modestly) for 2016, with high yield bonds leading the way.
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 increased from 22.76 to 25.46, which signaled a slightly negative 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)..
Weekly Comments & Charts
The S&P 500 finished negative for the second straight week and sits right at the support level that was set following the breakout in July. Prices stalled during the summer as there had not been a definitive move up or down since the S&P 500 broke through the ceiling set back in May 2015, but the past few weeks have seen an increase in price movement as markets continue to speculate over interest rates and the upcoming election. This could indicate an important inflection point in the equity markets. If the S&P 500 continues to use this old ceiling as a level of support, it could signal that markets are experiencing true positive momentum and are ready to continue making new all time highs. However, if the S&P 500 falls below the ceiling, it could signal a decline back into the sideways/downward trading pattern experienced earlier in the year. The coming weeks should give some valuable insight about the near-term direction of the S&P 500.
The S&P 500 is currently in an earning slump as the last five quarters have experienced year-over-year earnings declines. This is the first time the index has recorded five consecutive quarters of year-over-year earnings declines since Q3 2008 through Q3 2009. Weaker than expected earnings announcements from some of the major initial reporting companies weighed on stocks this week and analysts are expecting blended S&P 500 earnings to decline 1.8% for the quarter.
Analysts expect positive earnings growth to return in Q4 2016, with a current growth rate estimate of 5.6%. For all of 2017, analysts are projecting earnings growth of 12.8% as oil prices have stabilized through 2016. This could provide support for higher equity prices over the next year, but there are still many global uncertainties facing the markets to be conscious of.
More to come soon. Stay tuned.
Derek Prusa, CFP®
Senior Market Analyst
Derek Prusa 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.