Broker Check

2024 | May Risk Odometer

For the fourth consecutive month, our Risk Odometer score again remains deeply in positive territory at +3 and our Current Outlook remains at its highest level, “Positive”.  All of the individual indicators remained unchanged from the previous month.

Despite last month’s volatility in the stock market, we continue to be optimistic on economic growth.  We believe strong economic growth will support future stock market gains.  The only negative indicator we have remains Economic Indicators, but that risk factor is waning.  With all the other indicators positive, we are ignoring it for now.  All of our other indicators point to a positive outlook.

The recent bout of volatility can be attributed to a recent shift by the Federal Reserve in April when they recognized the recent pick-up in inflation would cause rates to remain higher for longer.  Their change in tune caused some to worry that the next change in rates could be higher not lower.  Equity market volatility ensued.  At the most recent FOMC meeting, though, the Fed addressed this worry and reiterated, although the timing was uncertain, that they still expected the next change in rates would be for lower rates.  We, along with the market, breathed a sigh of relief. 

The Fed’s bias towards lowering rates should provide support to markets if the economy slows.  Economic growth is expected to slow in coming quarters, but if the labor market remains healthy, and with rate cuts as support, we believe the stock market should weather the storm.

While not part of our Risk Odometer, the US presidential election remains an upcoming event that could cause market volatility.  We are not concerned about the event at this time because we do not believe that either outcome will necessarily be a concern for the markets.  Valuations are a concern, but we believe that is concentrated in popular warehouse names and not broader exposures which we believe offer substantial value.

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.