Broker Check

2021 | October Risk Odometer

We believe our Risk Odometer provides guidance in making better investment decisions because it keeps us objective and disciplined. We believe emotions are our enemy in investing and our Risk Odometer’s unemotional approach protects against this common mistake. We use it as a guide for judging risks in the equity market and for making tactical investment decisions in our proprietary investment strategies.

The Risk Odometer is composed of various indicators based on leading economic indicators, earnings, technical price action, breadth and volatility. Its score can range from +5 to -5. Readings greater than 1 are positive and reading less than or equal to 0 are negative. Our Current Outlook will be based off the Risk Odometer and have 4 possible levels: Positive, Cautiously Positive, Use Caution, Defensive.

The 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 opportunities than savings.

Special Note About a Change in the Risk Odometer: We have changed our Risk Odometer from seven underlying indicators to five. This will not have an impact on the net takeaway or our “Current Outlook”. We dropped the Sentiment and Reportable Positions indicators. Removing them had only a 1% impact on our Risk Odometer Outlook when analyzing historical readings dating back to 1987.

Our Risk Odometer moved down 1 point from +5 to +4 in October. Our Current Outlook remained unchanged at its highest possible level of “Positive”. Despite the one point drop in the Risk Odometer economic growth remains robust and our thesis of a bull market remains intact.

We had been warning the markets felt “as good as it gets”. Nothing goes up forever, so a correction was overdue. Our pullback in the Risk Odometer coincided with the market’s small pullback in September. This pullback resulted in our Volatility indicator creating the first warning sign. This is often the case as it is our most reactive indicator to short-term market action. In light of the other positive indicators, we view this pullback as expected noise within a bull market.

Economic headwinds are centered around the Covid Delta variant and elevated inflation. We believe the recent economic slowdown resulting from the Delta variant should abate but elevated inflation remains more problematic. As of now, strong growth for 2021 and 2022 remain the base case.

A removal of accommodative policy by the Federal Reserve has, and continues to remain, our biggest concern of what could change the secular bull market we have experienced for the past 13 years. We believe elevated inflation, that remains elevated far longer than what the Fed expects, would be the trigger that sparks the removal of accommodation. According to the Fed, we remain a long way away, so our fears are not something that should arise in the near term. It does, however, remain on our radar screen, and we advise investors to have a plan if or when this risk materializes.

Whether the risk of higher inflation materializes or not, we believe the risk of not protecting against it outweigh the costs. Elevated and persistent inflation is a phenomenon markets have not experienced in a long-time. Investments in this space remains under invested which could create tremendous opportunity.

Overall, the recent market pullback and move lower in the Risk Odometer does not alter our bullish outlook. We understand sentiment and valuations are high which can lead to sudden market corrections, but we view them as normal and opportunistic. This has been and will remain our stance unless inflation appears to be structural, the economy loses momentum and/or the Fed changes their policies. Those do not appear on the horizon in the near-term.

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 proprietary investment strategies. It is composed of various indicators based on leading economic indicators, earnings, technical price action, breadth and volatility. Its score can range from +5 to -5. 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.

FC Wealth Solutions and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

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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