Broker Check

2019 | August Risk Odometer

Our Outlook and Risk Odometer reading remained unchanged for August at “Cautiously Positive” and +4. Very little has changed in our indicators and outlook over the past 6 months. The things that are positive remain positive and the things that concern us are still there. Overall, the positives outweigh our concerns. Our tactical investment strategies remain predominately invested in growth with a small amount in defensive allocations while we closely watch unfolding developments.

The Federal Reserve lowered interest rates 0.25% to 2.0% on July 31. This was their first interest rate cut since the Financial Crisis over 10 years ago. The Fed described this move as a “mid cycle adjustment”. Their concerns were more about global growth and unresolved trade wars, and whether that would eventually have a greater future impact in the US. They do not see a recession in the horizon and referred to the rate cut as insurance, rather than the beginning of a long series of cuts which is typically more common.

On a positive note, Q2 earnings are coming in better than expected. Some analysts were calling for year-over-year declines and talking about the beginning of an “earnings recession”. With around half of US companies already reporting, earnings growth has been positive, keeping our Earnings Indicator positive as well.

Domestic stock prices continue to climb higher, but we remain sensitive to any warning sign of a change in trend. Our caution continues to stem around uncertainties regarding trade disputes, an inverted yield curve and global stock markets which are not confirming the strength of US stock markets. Stock market gains tend to last longer when strength is widespread rather than concentrated like has been recently.

Leading economic indicators continue to indicate slowing growth but growth nonetheless. A more cautionary tone will be struck when it indicates contraction rather than slowing growth. There is concern that uncertainties in trade policies will have a delayed economic impact, which we share. Contractions in leading economic indicators in the second half of this year will be a great way to measure that impact.

A major area of concern we have is the recent inversion of the yield curve. This is a rare occurrence when long-term interest rates (10 US Treasury) is lower than short-term interest rates (3-month Treasury bills). An inverted yield curve in the US has happened five times since the 1970’s, with each time eventually leading to a recession between 10-24 months after the inversion. The stock market peaked anywhere from 2-23 months after the inversion and fell between 17% - 57% from its peak (https://awealthofcommonsense.com/2018/07/arguing-with-the-yield-curve/).

Things can quickly change so it is important to stay abreast of changing developments. Information travels fast and the markets move at historically unprecedented speeds. We believe it is important for investors to monitor for changing conditions and we will continue to communicate these developments to our readers.

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.

 

 

 

Disclosures
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.

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