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Our Risk Odometer improved from a net score of -1 in November to 0 in December. Our Current Outlook remains at “Use Caution”. Our indicators continue to show cross currents with some negative fundamental indicators and some positive technical indicators. The continued conflicting signals still gives us caution.
We are beginning to witness some improving fundamental signs with our Earnings indicator turning neutral from negative for the first time in a year. Earnings in Q3 were stronger than most analysts expected, and that strength is expected to continue into the 4th quarter. If it does, it would further improve our Risk Odometer and tip our Outlook to “Cautiously Positive”, as long as the stock market remains resilient, and our technical indicators remain positive.
November witnessed very strong gains across stock and bond markets reversing losses experienced over the previous three months. A few soft inflation reports and some positive commentary from Fed officials created a complete 180 degree turn in the markets. Interest rates fell dramatically, and stock investors cheered with strong gains. It never ceases to amaze us how quickly markets can change. This is why we believe it is important to have an unbiased and disciplined approach to investing.
The rally last month broadened out but the relative performance of the Magnificent Seven continues to dramatically outperform everything else. We do not believe they will continue to outperform forever and encourage investors to broaden their portfolio holdings. Very narrow rallies are not a positive development. Broad based rallies are. We are monitoring the breadth of the market rally for clues for continued gains.
The economy continues to remain resilient despite higher interest rates. Higher interest rates have a lagged effect on economics, but they have not had a material impact on the overall economy yet. Growth remains above trend and the labor market remains tight. We will continue to monitor the health of the real economy, because in the end, this is what truly drives value in the stock market.
We want to be clear that although we have some near-term caution, we still believe the stock market is one of the best ways to grow your wealth. The boom-bust characteristics of our economy can cause the stock market to be very volatile over short periods of time. Long-term investors should view periods of volatility as opportunities to buy attractive assets at attractive prices and improve long-term returns. The Risk Odometer is our objective way of mitigating that volatility, so it does not lead us to make poor short-term investment decisions.
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 one 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.