Our Risk Odometer had its first move lower in many months, moving from 6 down to 4, causing our Outlook to change from “Positive” to “Cautiously Positive”. This is our first outlook change in several years and reflects prudent risk-mitigation steps we have taken in our proprietary strategies. Most of our indicators remain positive and we continue to have a positive outlook about the US Economy, but recent market developments have created some caution around that stance. Should the recent developments recede, we would return to a Positive outlook, and if conditions deteriorate, we would take further risk-mitigation steps and further lower the outlook. Our investment stance has always been that we do not believe in predicting the markets, rather we react to the data we know in a consistent and disciplined fashion. This stance keeps us objective and removes our emotions from the decision process. Emotions are our enemy in the challenging world of money management.
In last month’s Risk Odometer synopsis, I highlighted some of the potential risks (valuations, rising rates, trade wars) but noted they were not having a material impact on the markets. That gave way in October as equity markets experienced sharp corrections. There was no obvious reason that caused the sharp corrections. Events like this serve as a reminder that volatility should be expected and anticipated. Having a plan for dealing with inevitable fluctuations can make substantial differences to long-term returns. Our advice has always been to remain objective with consistency and discipline.
Our previously highlighted risks remain prevalent but are being offset by an economy that continues to show rapid growth, strong labor markets and contained inflation. Many economists are highlighting that although the current pace of growth is rapid, future headwinds are strengthening which would cause the pace of growth to return toward its longer-term trend. These headwinds include fading fiscal stimulus (i.e. tax cuts) and a weaker external environment (i.e. slowing global growth and trade wars). These are developments which we will continue to monitor.
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.