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 continued their Dr. Jekyl and Mr. Hyde behavior last week, posting gains in almost all asset classes and driving many indexes positive for the year. This seems to be the norm, but there are some important resistance levels the markets need to break through to create confidence to finish the year strong. More on that in the commentary at the bottom of this post.
Lesson to be learned: One week up, one week down. 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.
There were no changes to our economic or Bull/Bear indicators this week. Historically, this means our models think there is a slightly higher likelihood of stock market declines in the near term future (think <18 months).
In last weeks commentary I published a longer than normal video showing why it was important to not panic. The comparison was drawn to 2011, where markets dropped nearly 20% in just a couple months, only to rebound strongly and finish the year flat. LINK TO VIDEO
This year hasn’t been as pronounced, but it has been similar.
Then, it was QE3 that bailed the markets out and pumped money supply further into the financial system. Today, it’s the Fed keeping rates low when many feared they would hike rates (causing investor anxiety, selling, and thus down markets).
There’s still a possibility of interest rate hikes in the near term, and when it happens, the markets probably won’t like it. But the longer that wait is the more likely the markets will grind higher. The economy isn’t its strongest, but it’s not weak either. And here in the U.S. we still have one of the strongest, if not the strongest, economies in the world. This is one of the reasons the U.S. markets have outperformed the broad world markets the past few years.
The next critical level for markets is setting new all time highs. For the S&P 500 that would mean a move above 2,030, or about 2.5% higher than current levels. If the market can do that I’d expect a strong rally and a new uptrend. It might not last forever, but as we learned in 2011, when the market gets momentum in can last for years (2012-2014 were very strong).
Until that new trend become reality, however, it’s best to stay conservative and patient. It’s not always fun when we feel like we’re missing gains, but when the risks are higher than a few percent gain, it’s wise to be wary of the risks.
More to come soon. Stay tuned.
Phil Calandra and Jason Wenk