For the 4th month in a row, our Risk Odometer is unchanged at 0 with a Current Outlook of “Use Caution”. While the net score and Current Outlook are unchanged, indicators under the hood are changing, reflecting further deterioration in economic activity but improvements in technical market conditions. With conflicting signals from our various indicators, we remain cautious until we witness more clarity.
Although the net Risk Odometer score did not change, our Technical Price Action indicator went from negative to neutral as markets have seen large improvements from the lows in June. This improvement is giving us some early optimism because technical price signals are leading indicators. Fundamental indicators such as economic indicators and earnings tend to be lagging indicators. If the stock market is going to stabilize and improve, we would expect to see it first in technical indicators with fundamental indicators lagging. This is what we are currently witnessing. Higher probability signals are when both technical and fundamental indicators align.
There has been a lot of discussion about whether we are in a recession or not. We believe this is an inconsequential debate and largely for political show. The unofficial definition of a recession is two consecutive quarters of negative GDP growth, which we have now witnessed given last month’s Q2 negative GDP reading. Official recession calls are made much after the fact by a small group of eight relatively unknown economists at the National Bureau of Economic Research. The stock market’s sell-off of over 20% experienced in the first half of this year has largely accounted for the economic slowdown. Whether official or not, the market now appears more reasonably valued. We do not envision significant further slowdowns going forward. Inflation, and specifically gasoline prices, have begun to recede which should help improve the economic picture. Most importantly, the labor market remains strong. It is very hard to suffer severe recessions when people are employed, and their wages are growing.
We are expecting a better 2nd half of the year which should help to stabilize the markets going forward. We do not believe it will be a straight line up, and volatility should remain high, but we feel as though the worst may be behind us. We will wait to see confirmation in our indicators before we change our official outlook. Objective improvements will give us more confidence. We believe being objective is the most prudent way to manage money, but we did want to share opinions on how our Outlook may evolve going forward.
In summary, we remain cautious over the near-term given our mixed signals from technical and fundamental indicators. We are cognizant of potential further downside. We do not envision that potential downside as draconian at this time, so we believe there is good value for the long-term investors who are less concerned about near-term volatility. Our experience has taught us that many investors say they are long-term but react more like short-term investors. For this reason, we seek to manage downside risk during periods of uncertainty, an environment we find ourselves today.
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 our 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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