This month, we are introducing a new format to our Risk Odometer. Our Current Outlook Table to the right of the odometer now shows 4 categories: Positive, Cautiously Positive, Use Caution and Defensive. Our current stance will be highlighted while the other levels will be grayed out. This change was designed to show where we currently stand relative to the different possible outlooks.
For the second consecutive month, our Current Outlook remains “Positive”. Our net Risk Odometer score moved down one notch from +5 to +4 this month. The small change in the net score is merely noise.
The big picture remains one of subdued global growth but improving sentiment and economic projections. The improved sentiment regarding the trade war is the likely reason why global equity markets are moving higher. Global interest rates are at unexciting levels, so it does not take much improvement in the trade war to create positive sentiment for stocks. Strong labor markets and low inflation has allowed interest rates to remain low for longer than normal, extending the economic cycle to the longest in history.
Phase I of the trade deal has not been finalized, but this is not having a material impact on the markets. The consensus outlook appears to be progress will be made. We continue to believe Trump will need to make some progress on the trade front in order to win next years election. This should help keep stock markets elevated.
In terms of our Risk Odometer, we are witnessing a bifurcated trend in our indicators. Our longer-term indicators, which are more “fundamental” in nature are deteriorating. Our shorter-term indicators, which are more “technical” in nature, are improving. The short-term indicators are showing more strength than our longer-term indicators, hence the positive outlook.
One the fundamental side, Economic Indicators remains neutral. Earnings is currently positive but under the hood deteriorating rapidly. It could turn neutral without a pick-up in future earnings. The stock market is improving largely due to investors belief that the current slowdown is temporary. Global outlooks are improving as the markets await a Phase I deal. We can witness this improved sentiment in our technical indicators (Technical Price Action, Breadth and Volatility). Technical signals change much faster than fundamental signals so we remain on heightened alert for unexpected outcomes that will change investors sentiment. For this reason, we believe a dynamic approach to risk, in this stage of the economic cycle, makes sense.
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.