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.
In a holiday shortened week the markets put together a very nice 3-day rally. As a result, many asset classes that were negative YTD just last week, are now positive. With another short week this week, the fate of 2015 rests in the next few days. If they are down, the markets will likely post their first broadly negative year since 2008. Should they stay flat or go up, the 6 year bull market (at least on paper) continues.
Big difference though in modest single digit losses, compared to large, double digit losses like those most asset classes were seen in 2008.
Lesson to be learned: One week up, one week 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) improved slightly in November, signaling an improvement in the US Economy. The Bull/Bear indicator had no change 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).
Since little has happened last week, it’s important to continue to set the stage for what a possible down year means for investors. See below for some perspective…
As we move into 2016 it’s important to know that years like 2015 happen. In fact, in the last 50 years the S&P 500 has gone down in value 11 times (might be 12 depending on the next week). That means a little more often than every 5 years, the market went down. Yet, over those 50 years the average annualized return (including the reinvestment of dividends) has been 9.84%.
There are a lot of opinions about investing, but what we know for sure is that over the long haul, markets have historically gone up. And the price of admission to realize those long-term gains is that every few years there are steps back.
Looking into the new year, we continue to advocate investors remaining balanced to cautious, and no matter how hard it might be, remaining patient. The markets still haven’t made up their mind as to the current trend, and until that happens, we’re best to remain partially committed.
I would like to take a second to wish all of you a very Happy, Healthy and Prosperous New Year. Thank you for the opportunity to be of service in the old year and I passionately await 2016!
More to come soon. Stay tuned.
Phil Calandra and Jason Wenk
Chief Investment Strategists