Our Risk Odometer remained Positive and unchanged at +6 for the third consecutive month. The Odometer has had a Positive outlook since March 2016. The high reading continues to keep our big picture outlook positive. The foundation of the Odometer, The Big Three (Economic Indicators, Earnings and Technical Price Action), continue to confirm the positive outlook, further solidifying our stance.
The US economy continues to display strong underlying fundamentals. Second quarter earnings were stellar, leading economic indicators continue to point higher and the technical picture remains healthy as the S&P eclipsed the all-time highs set back in January.
Last year’s tax cuts are likely the biggest contributor to the continued strong earnings and economic growth. Indicators point towards this continuing to have a positive impact for the remainder of the year. We are monitoring timely technical indicators to give early warning signs of a change in trend, but they have not surfaced in any meaningful way.
A concern of mine is the impact trade wars are beginning to have. Tariffs have been a negotiating tool of President Trump to “level the playing field”. Implementing them began a few months ago and the President continues to threaten more if his demands are not met.
To date, they have had very little impact on the Risk Odometer (has remained consistently positive) and the US stock market (recently hit all-time highs) but they have been impacting international markets, sending a message that tariffs are more of an international concern than a domestic concern. This has created a rather dramatic domestic vs. international divergence this year. My concern lies in whether the US stock market can continue to buck the trend the rest of the world is experiencing. It has so far but the most robust and long-lasting bull markets usually occur with everyone joining the party. This divergence is something we are monitoring and will report if it begins to have more meaningful impacts.
I have always been a believer of the diversification benefits of investing domestically and abroad. Over prolonged periods of time, domestic and international markets have experienced similar returns, but these returns can be dramatically different over shorter time frames. We take measures to over or under allocate to domestic and international exposures but caution against making too much over relative performances due to the cyclical nature of the markets.
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 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.