Our Risk Odometer moved lower in May, and now, for the second time in three months, stands at 0 with a “Use Caution” outlook. This more cautious than normal outlook reflects the deterioration we have witnessed in technical price action of the stock market. The Odometer will remain volatile in the near-term as market volatility is high and indicators stand at inflection points which can cause sudden changes in readings.
The reasoning behind the recent market volatility is a renewed focus on rising interest rates coupled with lockdowns in China and an ongoing war in Ukraine with no end in sight. Chinese lockdowns and war in Ukraine have further exacerbated supply chain problems and are causing the highest inflation readings in 40 years, causing anxiety with investors.
We expect the market to remain volatile for the near-term. Longer-term, we take comfort that the US economy is still expected to grow above trend and pre-pandemic rates. Our indicators are confirming this short-term cautious but long-term positive outlook. Technical indicators, far more sensitive to shorter time frames, are negative. Fundamental indicators, more stable and better long-term signals, remain positive. If fundamental indicators remain positive, continued short-term weakness could materialize into longer-term opportunities.
We believe the Fed’s change in interest rate policy will be the most dominate event for the next few years. Rising interest rates will create a headwind for the markets. We will continue to objectively measure the risks of the markets with our risk indicators, but given the rise in interest rates, we will be more sensitive to risk warnings when they arise.
Our more cautious tone, driven by higher interest rates, does not mean we believe the markets are going to enter a bear market. We believe the economy would need to enter a recession for a sustainable bear market to ensue. The economy is still experiencing above trend levels of growth, therefore we do not envision a recession anytime soon.
Markets can remain volatile though, moving up and down in rapid fashion without experiencing a bear market. We believe this is a more likely scenario as the markets digest the rise in interest rates experienced so far this year. Typically, bear markets ensue much later into a Fed hiking cycle when rates are moved too high which negatively impact the economy.
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.
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.