Weekly Commentary, 3/06/17 to 3/10/17
The S&P 500 ended a six-week winning streak this week, canceling any celebration plans for the current bull market’s 8th birthday. All three major indices posted losses for the week. The S&P 500 and the Dow Jones each lost about 0.50% while the Russell 2000 Small Cap Index continued its underperformance, shedding 2.05%.
Increasing tensions between North and South Korea and the embattled French elections pushed prices lower early in the week. Contributing to the declines were falling commodity prices, uncertainty surrounding the European Central Bank, and the much awaited monthly non-farm payroll number.
Thursday, the European Central Bank (ECB) left interest rates unchanged and made no changes to its bond buying program. However, ECB President, Mario Draghi, commented that the ECB was shifting its outlook and was becoming more optimistic about the Eurozone economy and could be less inclined to provide additional stimulus.
Non-farm payrolls increased by 235,000 jobs last month and the unemployment rate fell to 4.7%. The report is consistent with comments from the Federal Reserve (Fed) Chairwoman that the central bank would likely raise rates at next week’s policy meeting. Average hourly earnings rose 6 cents or .2%, lifting the year-on-year increase to 2.8%. The Fed is concerned that a tighter labor market will put upward pressure on wages and boost overall inflation figures. With a hike in rates almost a given, it will be interesting to see the Federal Open Market Committee’s (FOMC) projections for the economy and the path (dot plot) of the Fed-funds rate for 2017.
The real action was in the bond market. Rates on the benchmark 10-year U.S. Treasury note rose to 2.60%, the highest since last December and settled at 2.58%. High yield bonds fared even worse with some high yield Exchange Traded Funds (ETFs) losing almost 2%.
The commodities complex might be looking at something other than inflation. Oil caught investor’s attention as crude oil skid 9% falling below $50 for the first time since December on record U.S. stockpiles. Gold shed 2.4% for the week.
From a technical perspective, despite this week’s pullback, market prices remain in an uptrend but are losing some shorter term price momentum. The percentage of stocks trading above their 50 and 200-day moving averages remains near 70%. After extended market gains, market breadth bears watching. Market breadth can provide information about the market’s condition alongside the market’s price action. It is important to see market breadth confirming price. As we have been writing, small cap stocks continue their underperformance with the Russell 2000 Small Cap Index closing below its 50-day moving average. Year-to-date, the S&P 500 is up 6% while the Russell 2000 Small Cap index is barely positive. Declining NASDAQ stocks led advancing stocks almost 2-1 for the week. High yield debt along with the energy sector has been lagging which can portend weakness in stocks. Stadion evaluates numerous price and breadth indicators and we have yet to see enough deterioration to warrant any changes to our current asset allocations in our trend following strategies.
Stadion Tactical Growth Strategy: As a dynamic asset allocation strategy, the Stadion Tactical Growth Strategy follows an investment framework that analyzes the Sharpe ratio of over 1500 ETFs over multiple time periods each day. Given the simplicity of the Sharpe ratio, we believe we get a unique lens into market activity by seeing the interaction of return and risk. The proprietary ranking system will generally narrow our focus to those ETFs that track well known asset classes, indexes, and markets. We believe this disciplined process will guide us toward the best asset allocation, which means at times, we won’t use bonds for diversification or our equity asset class allocation won’t resemble the traditional capitalization structure. By our definitions, the strategy is roughly 70% correlated to U.S. equities. There were no changes in the strategy over the week.
Stadion Tactical Defensive Strategy: The Stadion Tactical Defensive Strategy uses a weight of the evidence model combining two trend-following elements to determine risk levels in the market. One element focuses on longer term cyclical trends (the core) and the other seeks to balance safety and return among shorter to intermediate trends (the satellite). The satellite and core portions of the portfolio are fully invested. There were no changes in the strategy’s holdings over the week.
Stadion Managed Risk 100 Strategy: The Stadion Managed Risk 100 Strategy, Stadion’s most conservative tactical strategy, uses a weight of the evidence model which focuses on shorter term trends to determine risk levels in the market and the most appropriate asset allocation. The shorter tem risk measures continued their recent improvement. The portfolio is fully invested. There were no changes in the strategy’s holdings over the week.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. It is the most widely quoted measure of the overall performance of the small-cap to mid-cap company shares. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The U.S. 10-Year Treasury Note is a debt obligation issued by the United States government that matures in 10 years The Sharpe ratio measures the excess return per unit of deviation, or risk. The core personal consumption expenditures index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decision.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.