Our Risk Odometer (below) continues to remain fully into bullish territory, giving our equity strategies a full equity allocation. The main drivers of our risk odometer (Economic Indicators, Earnings, Technical Price Action) continue to remain in a firm, positive trend. The components inside of these indicators are also displaying widespread positive contributions, adding to the positive trend. Elevated valuations and lack of any significant correction remain as risks, but these risk factors are either poor timing mechanisms (elevated valuations) or subjective and difficult to time (lack of correction), therefore, not part of the Odometer. Believers in monitoring objective, historically significant indicators, we have yet to detect warning signs. Therefore, we continue to remain positive on risk assets.
August 2017 Monthly Review
- Risk Odometer remains unchanged at +6, well into bullish territory.
- US markets witness volatility but surge late month. International equities continue to lead.
- Economic data released in August continues its positive trend
- US politics continue to generate soap opera headlines without significant market effects
Equity Market Risk Odometer: Our Equity Market Risk Odometer remain unchanged at +6 in August, still firmly in positive territory. Leading economic indicators posted another strong month, adding to the previous two strong readings. Overall, they continue to point towards continued economic developments in the second half of 2017. S&P 500 earnings were 99% complete and overall positive. Most recent updates show an 12.1% increase from Q2 2016 with 73% reporting earnings above analyst expectations (64% average, 71% average over past 4 quarters, source: Thomson Reuters I/B/E/S). Technical price action has yet to deteriorate and sentiment and CFTC position data are not showing any extremes to create warning signs. All of this creates a lack of warning signs for equity markets.
Markets: Markets experienced some mid-month volatility, primarily centered around political and geopolitical concerns. The S&P was down nearly 2% intra-month and spent most of the month in the red. A late surge, though, took it positive on the month. Other equity indices were mixed with the small cap Russell 2000 down 1.3% but technology heavy Nasdaq 100 and emerging markets up 2.0% and 2.2%. Bond markets saw big gains, as the political uncertainty created a flight to quality. The US Treasury market was up 1.1% and the Aggregate Bond Index was up 0.9%. Gold also benefited from the flight to quality, up 2.3% in August.
Other Developments: The intra-month volatility was not caused by weak economic data. Data released in August was largely positive. Employment data was strong, with payrolls coming in above expectations and the unemployment rate dropping from 4.4% to 4.3%. Q2 GDP was revised up from 2.6% to 3.0% and forward looking ISM readings of 56.3 were strong and above expectations. Inflation reports in August continue to show tame readings, keeping alive the central banks conundrum of strong growth without a pick-up of inflation. Soap opera developments out of Washington. The president’s response to Charlottesville riots caused uproar amongst many, furthering discussions away from anticipated tax changes. Geopolitical developments were also front and center as North Korea continued push its nuclear ambitions against the will of much of the developed world. North Korea threatened to strike US territories in Guam and Trump responded it would unleash “fire and fury like the world has never seen.” The United Nations placed new sanctions on North Korea but this has done little to slow down their ambitions.
This information does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may view this information. Statements, opinions and forecasts made represent a particular observation and assessment of the market environment at a specific point in time and are not intended to be a forecast of future events or a guarantee of future results. Statements regarding future prospects may not be realized and may differ materially from actual events or results. Past performance is not indicative of future performance.
Each investment type has different investment risk characteristics. Risk is the variability of investment returns.
An investment in a money market fund is not insured or guaranteed and seeks to preserve the value of your investment at $1.00 per share. It is possible to lose money by investing in a money market fund.
U.S. Treasury bonds are guaranteed as to the timely payment of principal and interest.
TIPS offer a lower current return to compensate for the inflation protection. TIPS are tax inefficient and should belong in tax-deferred accounts.
Tax-exempt municipal bonds offer the opportunity to maximize your after-tax return consistent with the amount of risk you're willing to accept. Municipal bonds offer a higher net yield to investors in higher tax brackets. Municipal bonds may be subject to AMT.
Corporate bonds are considered higher risk than government bonds. Corporate bonds have higher interest rates than government bonds. The higher a company's perceived credit quality, the easier it becomes to issue debt. High yield bonds experience higher volatility and increased credit risk when compared to other fixed income investments.
Bonds have fixed principal value and yield if held to maturity. Prices of fixed-income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.
REITs do not necessarily increase and decrease in value along with the broader market. However, they pay yields in the form of dividends no matter how the shares perform based on different criteria than stocks.
Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks generally are more volatile than those of large company stocks. Growth stocks are more volatile than value stocks.
International investing involves special risks not found in domestic investing, including increased political, social and economic instability. Investing in emerging markets can be riskier than investing in well-established foreign markets.
The price of physical materials is subject to supply and demand.
It is not possible to invest directly in any index. The performance of an unmanaged index is not indicative of the performance of any particular investment. The performance of an index assumes no transaction costs, taxes, management fees or other expenses. Past performance does not guarantee future results.
Sector investing that concentrate its investments in one region or industry may carry greater risk than more broadly diversified investments.
There is no assurance that by assuming more risk, you are guaranteed to achieve better results.
Historical performance relative to risk and return points to, but does not guarantee, the same relationship for future performance.
Diversification through an asset allocation plan is a useful technique that can reduce overall portfolio risk and volatility. Diversification neither ensures against a profit nor protects against a loss. Diversification offers returns which are not directly related over time and is intended for the structure of a whole portfolio to reduce the risk inherent in a particular security.
Data Source: YCharts
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Michael Fickell is an investment advisor representative of FC Wealth Solutions
Securities and investment advisory services offered through FC Wealth Solutions, a registered investment advisor.