(BrookstoneCM creates amazing economic commentary. This is a slightly abridged version of their most recent weekly thoughts . . . the same thoughts that drive their investment framework.)
Fed Chair Powell surprised markets with language signaling the end of the Fed’s asset purchasing program sooner than originally planned. Economists and analysts suspect the true purpose for discontinuing easing quicker than originally stated is to provide flexibility for the Fed to raise rates next year.
While economic progress continues its long slog toward recovery, residual effects of the pandemic lockdowns continue to drag on the global economy. While shortages of everything from microprocessors to natural gas appear to be slowly improving, supply chains remain the number one obstacle to a more robust recovery. Overall, markets have performed well YTD, but headwinds continue to fiercely resist further progress.
A new dimension has emerged recently in energy markets. China recently has been unable to produce the energy needed to keep its power grid running without interruption. Additionally, Europe and other regions have struggled to acquire enough supply of natural gas to meet anticipated heating needs for winter. Many analysts are anticipating high and possibly rising natural gas prices as countries desperately try to fill shortfalls before the weather turns too cold. Additionally, concerns over manufacturing operations in China could remain for some time.
BA headwind could be on the horizon for fixed income assets, as the Fed has begun tapering its asset purchases which could raise yields. Tapering will undoubtedly have an impact on yields, but the degree of impact is uncertain.
Legacy FormulaFolios Indicators
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 a nutshell, we want the RPI to be low on a scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to read at least 66.67% bullish. When those two things occur, our research shows market performance is typically stronger, with less volatility.
The Recession Probability Index (RPI) has a current reading of 27.58, forecasting a lower potential for an economic contraction (warning of recession risk). The Bull/Bear indicator is currently 100% bullish, meaning the indicator shows there is a slightly higher than average likelihood of stock market increases in the near term (within the next 18 months).
It can be easy to become distracted from our long-term goals and chase returns when markets are volatile and uncertain. It is because of the allure of these distractions that having a plan and remaining disciplined is mission critical for long term success. Focusing on the long-run can help minimize the negative impact emotions can have on your portfolio and increase your chances for success over time.
