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.
After a few weeks of broad market gains, last week was a week of pause. Most asset classes were slightly down after reaching 1-year highs on Tuesday. Even after the small losses of last week most indexes remain positive (modestly) for 2016.
Lesson to be learned: Never get too upset. And never get too excited. Markets have been flustering some of the smartest people on the planet for many, many years.
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 February, signaling a modest slowdown in the US Economy. The Bull/Bear indicator remains 33% bullish (67% bearish). Historically, this means our models think there is a slightly higher likelihood of stock market declines in the near term (think <18 months).
The S&P 500 finally broke above the top of the downtrend channel we’ve been watching for the past few weeks. It wasn’t a decisive move, and ideally we’d still like to see the downtrend “tested” one more time, but overall this is a positive sign for the markets.
A “test” would be a market drop that stays out of the channel (the area between the two red lines). Should this occur, and the market then makes a move back to new 2016 highs, it would be a very positive sign for the near term.
This week’s chart
While market trends are useful for study, there’s always more to investing than just the charts. We still need to be a little cautious about earnings (they are broadly declining), the dollar (broadly declining also, sending oil back up), and an election that is right around the corner.
Most importantly, as investors we need to stay committed to our long term financial goals. All the short term news and market movements can be the most debilitating of all when it comes to making sound investment decisions; especially if we allow them to influence knee-jerk decisions.
More to come soon. Stay tuned.
Phil Calandra and Jason Wenk
Chief Investment Strategists