After many requests I am happy to roll out this inaugural weekly 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.
It’s worth noting the change of the guard over the past year. Many of the top performers over the past 1 year are shifting to the bottom in the shorter term, whereas the lesser 1 year performers are leading the way the past month.
Lesson for wise investors – don’t just buy last years winners.
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.
After a rough month of June, as well as a poor start to July, most financial markets have found a little footing the past couple weeks. However, this week there was another step back, as seen clearly in the 1 week returns in the Market Update table. Outside of higher quality bonds, all other asset classes have been going backwards.
This isn’t surprising to us, as our US Equity Bull / Bear indicator has been more bearish than bullish for a couple months now. Many markets are trading sideways and have been for 6+ months. While Greece was given a short term bandaid for their financial woes, it is far from permanent. And the bigger elephant in the room is the economic slowdown in China (still growing, just not at hyperbolic speed).
It’s times like this that investor fortitude is often tested. Going 6-12 months with little to no gains, or even losses, shakes the confidence of many. The big institutional investors know this, so don’t be surprised to see them taking profits, which would cause the market to drop further, then watch the smaller (everyday) investors sell in panic, creating even further losses.
It’s the classic market correction pattern that seems to happen every few years.
For what it’s worth, this is exactly what the big investors want – a market correction in the face of an actually strong economy. It creates opportunity to make investments in high quality, growing businesses, at cheaper prices. Since they sold high to lock in previous profits, it’s easy for them to be confident buyers after a 10% (or 20%+) decline.
The losers in this situation are the regular investors that panic and make changes to their investment strategy for the wrong reasons and at the wrong time.
Don’t let the big investors do this to you. If you have a solid investment plan, appropriate for your long term goals, rooted in academic research – there’s no need to panic.
Here at FormulaFolios we often take risk off the table in times like this, which can be a little frustrating if you don’t have the right mindset (a long term, disciplined mindset, to be precise). But, it’s our way of leveling the playing field, giving our clients a better chance to invest the same way the big Wall Street fat cats do (buying low and selling high). It just takes emotional control and time, two things many investors struggle to stay committed to.
More to come in the next few weeks. Stay tuned.
Chief Investment Strategist