March 16, 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.
Market Update
Financial markets have put in a strong push the past few weeks, continuing with gains the last 5 days. Most “growth” asset classes are close to break even for the year now, and all “income” asset classes are positive.
Lesson to be learned: One week up (sometimes a few weeks 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.
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 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).
Weekly Comments
The financial markets continue to battle back early year losses, and are broadly very close to turning positive. This is great news, though we’re not out of the woods just yet.
Per the chart below, we can still see the market is in a downtrend. It’s at the high end of the range, but definitely needs to break out of the red “channel” you can see drawn over the chart.
A definitive breakout would be an S&P 500 move above 2050, and then staying there or higher for a few weeks.
Until then we need to stay balanced, a touch more conservative than normal, and committed to our long term investment plan.
In our models we’re still cautious, but feeling more optimistic then we did in January and February. Our longer term trend indicators are still pointing to a good possibility of a bear market at some point this year. Because of this we need to be nimble, and pay close attention to potential warning signs. Should this happen, I’ll be sure to share them here on our blog.
More to come soon. Stay tuned.
Regards,
Jason Wenk
Chief Investment Strategist