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It sure is nice to present some good news this week. Our asset management team is diligently analyzing the economy and markets for your protection. Our Recession Probability Analytics are showing strength returning to the economy for the first time in months. Please read this short message from our Chief Investment Strategist Jason Wenk.
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 were mixed last week, but still posted one of the best overall months in years. 4 years, to be precise, as it relates to US Equities. This pushes the 1 year returns back into respectable territory for most benchmarks (so long as 2-5% is respectable in your book).
Lesson to be learned: A month or two mean very little in the long run, but sure can be annoying when they are all over the map.
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 changes to our economic or Bull/Bear indicators this past week. On the economic front, the model is slightly weaker; while on the Bull/Bear indicator the reading is stronger. Historically, this means our models think there is a slightly higher likelihood of stock market declines in the near term future (think <18 months).
October is now in the books, and set some records by posting the largest monthly gain in over 4 years here in the US. However, there are still some people wondering if this is just a head fake.
To understand this, we sometimes need to take a step back and look at history. You see, back in 2011 the market dropped about 15% in just a few months. There was panic that the Federal Reserve’s QE2 program would expire, the economy would slow down, rates would jump, and the (then 2 year) bull market would be over.
But then the Fed announced QE3, money supply jumped, the economy motored along, and all was well. The markets rallied and within just 2 months erased the 15% losses.
This time around is awfully similar. The Fed is not raising rates, China is lowering rates, and a few key companies posted fantastic earnings. All again is right in the world.
Except we’re not quite out of the woods. The market still hasn’t erased all of the losses, though it is close. There’s not likely going to be another stimulus plan, all the while the economy really is growing at a slower pace than recent years.
So, as an investor, what do we do?
Our approach is simple. We stay committed to a long term plan to be optimistic when presented with data that suggests we should, and cautious when it doesn’t. Today, this means being mostly invested, while still having a close eye on key market indicators that could help warn us if the October rally was really just a head fake.
More to come soon. Stay tuned.
Chief Investment Strategist
If you would like to talk more visit us at http://solidwealthadvisors.com/contact-us/
*Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.