2025 | March Risk Odometer
Our Risk Odometer moved down from +4 to +3 this month but our Current Outlook remains unchanged at his highest level of “Positive”. The tick down in our net Risk Odometer score can be credited toward heighted volatility which began towards the end of February and continued into March. This increase in volatility but did not have enough of an impact on other indicators to change our outlook.
Political and economic uncertainty stemming from Trump’s tariff policy is the main culprit of recent stock market volatility. Markets hate uncertainty, and back-and-forth tariff policies are creating a very uncertain future. While we were optimistic about economic growth following the presidential election in November, we did recognize valuations were high and sentiment was optimistic. Our main concern was tariffs and their impact on market volatility.
With the euphoria of the Trump’s election fading, the reality of tariffs and austerity stemming from slashing government programs and jobs is now upon us. We are not surprised at the recent volatility but were expecting it. Prior to it occurring we felt it would be an opportunity, and we continue to believe that now that it is upon us. We are not sure how far it will go or long it will last, but we view it as an opportunity to buy quality assets at discounted prices.
The underlying fundamentals of the economy remain strong, company earnings are growing at healthy pace, and the labor market remains strong. Trump can change his mind at any time and pivot his policies in market friendly ways. We also recognize interest rates are still elevated, giving the Federal Reserve room to provide stimulus to the economy. These positive aspects, along with the positive readings in our Risk Odometer, keep us optimistic in the face of increased volatility.
We will continue to monitor rapidly changing developments closely. Impacts on economic growth, the labor market and/or company earnings will change our outlook. Sizable impacts in these areas have not materialized yet.
It is important in times of volatility to be careful getting caught up in news headlines and fear mongering stories. Investors need to remember that fear sells, and news outlets are in the business of selling stories. Prudent investing requires unemotional decision making based on facts and risk management.
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.