2020 | April Risk Odometer

For the 3rd consecutive month, we have moved our Current Outlook down another level to “Defensive”, the lowest of four possible levels. The downgrade comes as significant price deterioration in the stock market turned our Technical Price Action negative, moving the overall Risk Odometer score to zero.

Given the lag of Economic Indicators and Earnings indicators, I would expect the overall score to turn negative in the months ahead, keeping our Outlook Defensive. We are not expecting this situation to end quickly and are advising our clients to be cautious and maintain a long-term perspective.

Given the dire economic projections related to the coronavirus pandemic, it should come as no surprise that we have entered a recession[1]. The most important question, now, for the markets is the duration of the recession. Many economists are projecting dire projections for the second quarter but a sharp rebound in the 3rd and 4th quarters. These projections are nearly useless at the current time given the wide range of potential outcomes. Much of those projections are educated guesses combined with extracting the economic situation in China. China seems to be a couple of months ahead of us in terms of this virus. They seem to have controlled the spread of the virus and have begun to reopen their economy. Hopefully, the same situation plays out here. Until we get more testing and better statistics, accurate economic projections are nearly impossible at this stage.

Investor sentiment and market technicals are better short-term gauges in this highly uncertain environment. Emotions are always the enemy in investing. This is even more important now. What may feel good in the short-term may not be the best decision in the long-term. Markets may react differently than what many might expect. The low of the stock market in the 2008-2009 recession (3/6/2009) occurred on the day of the worst monthly employment report on record. Following that awful report, the stock market rebounded the next day and spent the next 11 years going higher. This is what makes investing difficult. This is why we try to remove our emotions and follow objective indicators.

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.

[1] Official recessions require two consecutive quarters of economic decline as reflected in GDP released by the National Bureau of Economic Research, therefore we could not “officially” enter a recession until at least the second half of 2020

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.}

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^{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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