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.
For the second week in a row the markets did not impress. Most of the markets ended down for the week pushing their returns into lower territory.
The S&P 500 and Dow Industrial Average are getting closer and closer to the soft bear territory we have been informing our readers about. Other major markets are already in bear market territory while U.S. Treasuries are still providing a nice safe haven for investors.
Lesson to be learned: One week 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.
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).
This week investors faced continued pressure from plunging oil prices, tightening financial conditions, global growth and increased market volatility.
Conditions like these are often worrisome, however investors should take comfort in knowing that we continue to stay cautious. Establishing a smart investment program will help investors better understand market conditions and how they may impact their situation. Adhering to the program is one of the smartest, and at the same time, hardest tasks for investors to accomplish.
More to come soon. Stay tuned.
Chief Investment Strategist