February 23, 2016
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.
Markets finally got their first big up week of the year this past week, with many equity markets rising 3-5%. Bonds slipped up just a touch for the week, but remain the only asset class in positive territory year to date.
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 the past week market rally US stocks are now about 10% away from a true bear market. This means stocks are largely in no-mans land, still trending down, but not yet in a bear market.
Markets like this can be frustrating as the prudent investor needs to be at least partially invested to make sure they don’t miss out on a quick recovery, should this simply be a market correction, while also avoiding sharp losses should this turn out to become a true bear (20% or greater decline over 6 months or longer time period). Either way, we know we’ll be only partially right (and partially wrong for that matter).
Our view is being correct when a bear market comes is far more valuable than being correct in assuming the market will go up. 20% or larger losses are not only hard to take psychologically, they can take a long time to recover from as well.
So, even though the past week was up, and it’s possible this week could be too, our stance on market conditions remains unchanged. There’s still a good probability the markets go lower in the coming months and we believe investors should be cautiously invested. This doesn’t mean to hide money under the mattress, but it does mean being balanced and favoring a conservative investments over aggressive growth investments.
More to come soon. Stay tuned.
Chief Investment Strategist