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2017 | June Risk Odometer

Equity Market Risk Odometer*

June 2017 Monthly Summary

  • Full Steam Ahead! Equity Market Risk Odometer further rises to an extremely rare +7
  • Equity markets rally. Central bank comments incite bond market sell-off
  • Fed raises rates for the second time this year to 1.0%


Equity Market Risk Odometer: Full Steam Ahead! The Equity Market Risk Odometer finished the month with a very rare, all 7 categories in positive territory. Readings this high have only occurred 2% of the time in a 30-year history of the indicators. Higher odometer readings display more confirming signals across diversified factors and thus create higher probability signals. While the factors can easily change, there is nothing on the current radar displaying warning signs. One area of caution, popular valuation metrics such as Price Earnings Ratios, which are not factors in the Risk Odometer due to them being poor market timers, are historically elevated. This has many market followers worried, yet these signs have yet to surface in our more timely odometer readings.

Markets: The big story in the month of June was the sell-off in technology shares and bond markets. The Nasdaq 100 finished down 2.4% in June, while the S&P and Russell 2000 were up 0.62% and 3.46%. Small differences in the different indices is common but large differences witnessed in June, along with the Nasdaq being down while the broad market being up is also rare. One month results may only be noise but it is something to follow given the popularity of the technology sector with many investors. The bond market, which has generated nice gains most of the month, experienced strong selling pressure at the end of the month following hawkish comments from the European Central Bank and other central banks across the globe. The benchmark Barclays Aggregate Bond Index fell 0.1% on the month, bringing its year to date total down to 2.3%.
The bond market has not been the only sector where weakness has surfaced. Commodities have faced selling pressure as well. DBC, our ETF proxy for the commodity market, was down 1.0% in June. Gold was also down over 2% on the month. Commodities and gold tend be viewed as an inflation hedge, therefore as global inflation readings have recently cooled, so have investor appetites for these sectors.

Economic Developments: Economic growth continued its stable path in June. Employment readings cooled in the beginning of the month but they remain in stable growth territory. The unemployment rate dropped another tenth to 4.3%, a new cycle low. The Fed raised rates for the second time this year to 1.0% and their projections are calling for one more hike this year and 3 more next year, projecting a 2.0% rate by the end of 2018. Their post meeting press release noted a labor market that continues to strengthen, business spending that continues to expand and household spending that has picked up from earlier weakness. They recognized the recent decline in inflation but expect it to return to their target in the medium-term. Bond and equity markets were largely unchanged as the move was widely expected. What did cause movements later in the month were comments from ECB President, Mario Draghi, whose speech was taken as a sign an exit of the ECB stimulus was closer than most anticipated. Although global central banks still remain very accommodative, their stance, or at least dialogue, has begun to sound less accommodative.





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

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