For the sixth consecutive month, our Risk Odometer remains unchanged and deep into positive territory at +3 with a Positive Outlook. All of the individual indicators also remain unchanged for the sixth consecutive month.
The lack of change in our Risk Odometer is common when the economy chugs along in a resilient manner as it has been this year. Despite high interest rates and elevated inflation, the economy continues to grow, company earnings continue to grow, and the labor market remains healthy. The steady Positive Outlook in our Risk Odometer is reflective of the resilient economy which has continued to power the stock market higher this year.
We continue to have concerns but categorize them as “Show Me” worries. We remain concerned about the lagging effects of elevated interest rates, an inverted yield curve and negative Leading Economic Indicators. We discount these worries until they generate real-time impacts but will remain on our radar. The opportunity cost of worry over reality is too great.
We are still not concerned about the risks surrounding the upcoming presidential election. We do not see either a Trump or Biden victory as bad for markets. A Biden victory will be status quo which is typically a good thing for markets. A Trump victory should also be positive given his previous market friendly policies.
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.
