Broker Check

2023 I October Risk Odometer

For the sixth consecutive month, our Risk Odometer remains unchanged at +1 with a Current Outlook of “Cautiously Positive”.  The indicators below the hood continue to paint the same picture, positive technical indicators and negative fundamental indicators with the net effect still being slightly positive. 

 

We have previously stated that each month our Risk Odometer maintains a net positive reading we increase our confidence in our outlook.  While this still holds true, the stock market has experienced some recent volatility and is challenging that increased confidence.  The negative fundamental indicators that have been embedded for nearly a year have always created some doubt within our net positive Risk Odometer reading.  Despite this doubt, we would need to witness technical indicators cross their defined threshold and confirm negative fundamental indicators before making an official outlook change, which has not occurred yet.  This unemotional, discipled approach is similar to what we believe should be the cornerstone of any investment plan.

 

The culprit for recent market volatility has been rising interest rates.  Yields on US government bonds are now over 5%.  The yield curve remains inverted with short-term rates slightly above 5% and long-term rates slightly below 5%.  Yield curve inversions are extremely rare and have preceded every recession in the US as far back as reliable data goes.  The bright side of rising interest rates is that they create a reliable alternative to stocks, especially if our outlook deteriorates.

 

Despite the inverted yield curve and negative fundamental indicators, the real economy continues to remain resilient.  Higher interest rates have not had a material impact on the overall economy yet.  The labor market remains tight and healthy.  The Federal Reserve increased their growth projections and lowered their unemployment rate forecasts at their meeting in September.  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.