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Our Risk Odometer improved again in March from -1 to 0, thus upgrading our Current Outlook from “Defensive” to “Use Caution”. Although this is an upgrade in our net score and outlook, there are still many risk factors flashing warnings that we maintain a cautious outlook.
The recent indicators that have improved have been technical indicators. Technical indicators are more volatile and give more false signals than fundamental indicators. On the other hand, technical indicators are often the first to detect a turnaround in markets while fundamental indicators are lagging indicators. The most powerful signals come when both technical and fundamental indicators confirm each other. Because they currently do not, it gives us additional caution.
Our biggest worry continues to be Leading Economic Indicators that are deeply negative and an extremely inverted yield curve. Both of these signals have preceded every recession since the 70’s. We are also aware that stock markets often bottom during a recession, not before it. We continue to expect a recession to occur sometime in the next twelve months. If that were to occur, and history would repeat itself (stocks make their low during a recession), this would mean volatility could lie ahead.
The markets had a big rally in January and gave some but not all of it back in February. We continue to view this year’s gains as a rally within a bear market. Last year’s big outperformers are experiencing losses while last year’s big underperformers are experiencing large gains. This type of rally is not broad based.
Broad based rallies are more sustainable. This also adds to our caution of weak Leading Economic Indicators and an inverted yield curve.
Although we are expecting a recession in the next twelve months, this is not a disastrous outcome for investors. Recessions leave behind attractive opportunities and bonds are now offering very attractive yields for the first time in over a dozen years. The largest stock market gains often come as a result of a previous recession. The key is staying invested through turbulent times. We use our Risk Odometer to help us mitigative downside losses during turbulent times so we can remain invested and experience the large gains that often follow.
We want to be clear that although our Risk Odometer is defensive, 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 markets 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. Volatility can cause investors to panic and make poor investment decisions and damage 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.