Our Risk Odometer remained stable at +4 this month and the current outlook remains as “Cautiously Positive”. Despite the modestly high Odometer reading, many of the indicators sit near inflection points and could quickly turn from positive to negative. This means our outlook could easily change in the coming months.
Intra-month, the Risk Odometer had dropped to +2 but recovered to +4 by month end following a sudden market turn-around at the end of November. It is key during these inflection points to monitor incoming data and remain objective. Recently, markets have moved with unprecedented speed and velocity and this can elicit many emotional responses. In these environments it is best to divorce yourself from those emotional responses and have a plan for dealing with unavoidable aspects of the markets. Ideally, these plans are disciplined and objective. This is the objective of our Risk Odometer, to provide a disciplined and objective approach and avoid emotional responses. It will never be perfect, but it will provide a structure for removing emotions from challenging decisions.
Our opinions on the markets is that we are at an inflection point. Global growth has clearly slowed but it remains positive. Inflation has ticked higher but remains in check. Positive growth and modest inflation are generally supportive for equity markets. Whether the current global growth slowdown is temporary or the beginning of something larger is uncertain. In my opinion, the Federal Reserve and other central banks do not need to turn restrictive with interest rates. This should support the temporary slowdown case. Interest rates are rising in the US which is different from the last slowdown that occurred in 2015, but they are not restrictive at this point. This will be a key development to follow.
The Fed recently changed their tone on their outlook for interest rates and the markets cheered this stance. The perception is they will not raise rates as high and fast as previously expected. Risks surrounding the tariffs between China and the US still exist, but a recent temporary truce also gave the markets a boost higher. These risks (rising rates and trade wars) remain, along with historically elevated valuations, so it remains imperative to monitor incoming data. We do not believe in predicting the markets, only reacting to the data we know in a consistent and disciplined fashion. The remainder of 2018 and beginning of 2019 should add some clarity. Stay tuned.
As always, we continue to believe our Risk Odometer provides guidance in making better investment decisions because it keeps us objective and disciplined. We use this methodology and advise our clients to do the same. Emotions are our enemies in investing.
It is important to understand that our Risk Odometer is not designed to anticipate small to medium corrections, typically those in the 5-15% range. Instead, it monitors for conditions which have typically preceded larger corrections. We believe trying to anticipate small to medium corrections sounds attractive but more often results in lost opportunity than savings.
The Equity Market Risk Odometer is our guide for judging risk in the equity market. It is used as a guide for investment decisions in The Core Equity Strategy. It is composed of various indicators based on leading economic indicators, earnings, technical price action, breadth, volatility, sentiment and reportable positions from the Commodities Futures Trading Commission. Its score can range from +7 to -7. Readings greater than 1 are positive and readings less than or equal to zero are negative.
This information does not have regard to the specific investment objectives, financial situation and the 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.