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.
Just when we thought the markets were clearly in a downtrend, they went and recovered. Well, mostly. After a horrendous start to the week most major markets indices were able to turn on a dime and finish the week slightly positive. Considering the week started with a 1,000 point drop in the Dow Jones Industrial Average on Monday morning, I’d say that was a more than welcome recovery for most investors.
Lesson to be learned: Just when you don’t think it can get any worse, it either does…or doesn’t. In other words, markets don’t care much what we think. ?
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.
There was no change in either indicator since last weeks update.
Last week I wrote about why investors should not get too emotional when the markets experience a correction, even when it’s fast and severe. Turns out, that was pretty good advice. That said, it’s the easy thing to say because we have hundreds of years of market history to back it up.
What happens next is quite a bit less clear (at least in the short term).
This week marks the end of August, and almost certainly it will end with most stock indexes down a good amount (for the month). It also is pretty critical what happens on Monday as the 50 day market average is just a hair lower than the 200 day market average. This is called the “Death Cross” and historically, pretty much every large scale market loss was preceded by the occurrence (Black Monday of 1987, Dot Com crash of early 2000’s, and Financial Crisis of 2007-2008 just to name a few). If the market is flat or down on Monday, the month ends in Death Cross zone. If it’s up a hundred points or more, then the month ends outside the Death Cross zone.
This is important because there are many tactical asset allocation managers, market timers, and technical traders out there that will automatically start selling their stock holdings if we drop in the Death Cross zone. If the larger investors start to sell, it can get ugly fast, which we saw just a couple weeks ago.
So I’d say Monday is pretty important as a tone setter for the rest of the week, month, and possibly the year.
As an investor, the smartest thing we can do is let this play out and try not to panic (or get excited). One day won’t change the next 1o years. That said, it might change some of our own asset allocation suggestions, so expect to hear more on the blog before the end of the week.
More to come soon. Stay tuned.
Phil Calandra and Jason Wenk
Chief Investment Strategists