Broker Check

2024 | February Risk Odometer

For the first time since January 2022, our Current Outlook has moved to its highest level, “Positive”.  Our Risk Odometer net score also moved up to +3 this month, its highest reading in over two years.  The force behind this change was the broadening out of the equity market rally that began in November.  This triggered our Breadth indicator to move from negative to positive, and our net score from +1 to +3. Four of the five indicators we monitor are now positive, thus giving us additional confirmation of the strength of the equity market.

 

As the markets have improved from short-term lows in November, we have also witnessed continued improvement in the indicators we monitor.  Last month it was an improvement in Earnings and this month an improvement in Breadth.  Economic Indicators is the only remaining warning signal.  It has been a reliable signal historically, so it is still concerning.  It has begun to improve, though, which is positive.  Nevertheless, with the number of positive indicators we are witnessing, we discount its concern at this point. 

 

An important new element for the markets is the Fed stating they believe rates have peaked and that they plan to lower rates later this year.  This is dramatically different from their aggressive rate hiking campaign in 2022 and 2023, which was the biggest culprit for the stock market sell-off in those years.  Their change in interest rate policy was the catalyst for the stock market rally that started in November.  Although they will likely not lower rates until later this year, the idea of it will be supportive for equity markets prior to its actual occurrence. 

 

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.