Broker Check

2024 | January Risk Odometer

Our Risk Odometer improved again this month, from 0 to +1, subsequently improving our Current Outlook back to “Cautiously Positive” where it was in October.  We are not completely out of the woods given legacy warning signals, but those warning signs are dissipating and offset by the majority of indicators which are positive, leading us to be more optimistic than cautious.  

Driving the change in our outlook was improved company earnings.  The earnings recession that was in place for most of 2023 is now over as year-over-year earnings are once again positive.  This improvement is quite remarkable given the rapid increase in interest rates in 2023 and widespread calls for a recession that has yet to materialize.  We do not believe everything in the economy is rosy but given the amount of time it has been resilient with elevated interest rates, we are more optimistic it can handle it.  This resiliency, along with an improving Risk Odometer, and interest rates which we believe have peaked, makes us more optimistic going forward.

An important new element for the markets is the Fed stating they believe rates have peaked and that they would be willing to move them either up or down going forward.  This is dramatically different from their one-way bias in 2023, which was the biggest cause for market volatility.  A financially supportive Fed willing to lower rates can minimize stock market losses if the economy does experience a recession.  This supporting element was not present in 2023 when we were nervous about the stock market. 

Of the indicators that remain cautious, leading economic indicators worries us the most.  They have remained negative for well over a year, and this has historically led to a recession.  In addition, rising interest rates and a yield curve that remains inverted have also historically predicated recessions with tremendous accuracy.  Despite this, the economy has remained resilient, so we are not witnessing any tangible evidence yet.  Things can quickly change, so we will continue to monitor real-time economic conditions and adjust our outlook accordingly.  

We want to be clear that although we have some near-term caution, the majority of the indicators we follow are optimistic.  We continue to believe the stock market is one of the best ways to grow your wealth over the long run, despite any near-term caution we might have.  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.