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.
Last week marks two positive weeks in a row (broadly speaking). This is the first back to back positive investing weeks for most asset classes, and looks to make February close out slightly positive for the month. Markets are still more ugly than pretty over the past year, but positive months are always a welcome sign to weary investors.
Lesson to be learned: One week up, one week down (sometimes a few weeks down), one week flat. Markets can do this in the short term, which is why we have to invest for the long term.
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 be at least 67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.
The Recession Probability Index (RPI) increased slightly in January, signaling a modest slowdown in the US Economy. The Bull/Bear indicator is unchanged this week (100% bearish). Historically, this means our models think there is a slightly higher likelihood of stock market declines in the near term (think <18 months).
With each positive week in the markets, we’re moving further away from a possible bear market. Sure, indexes are still down close to or slightly more than double digits, but the fears from January seemed much more than a month ago.
The danger here is chasing the market direction. We saw this with investors abandoning their portfolios a few weeks ago, at exactly the wrong time. Now, some of those same investors, are thinking it’s time to get back in. Sadly, they’ve already missed 4% or more of the recovery, and are doomed from the same mentality that made them panic now that the markets are off their lows.
I’ve said it many times before, but the price of admission to the long term gains of capital markets is the short term volatility that comes with it. If we have a sound investment strategy, risk-appropriate portfolio, and coordinated financial plan; there’s no reason to worry about that price of admission.
Looking forward, our models are still cautionary. We are invested, but balanced and leaning toward being conservative. We’ve been this way for quite a while now and it’s served us well in dealing with all the market volatility. Until we see a little more follow-through on the current short term rally, our models are not likely to change in a major way.
More to come soon. Stay tuned.