Our Risk Odometer held steady at +4 this month, marking the second consecutive month at this level following August's improvement. Our Current Outlook remains at its highest level of "Positive," a rating we have now maintained for over a year.
September brought no change to any of the five underlying indicators. A market that consistently sends the same favorable signals across all indicators is itself a constructive sign, even in a month without a new headline driver.
That stability came against a market backdrop that grew a bit more complicated. New Fed Chairman Kevin Warsh struck a notably hawkish tone at the Fed's annual Jackson Hole conference in August, signaling he wants clear evidence that inflation is heading back toward the Fed's target before easing up on interest rates.
At the same time, oil prices have been climbing back toward the highs reached at the outset of the conflict in Iran. With that war showing no clear sign of resolution, energy costs remain a wildcard. The duo of a hawkish Fed and rising oil prices have caused interest rates to move higher. So far, this has not caused a meaningful pullback in stocks, but it represents a growing headwind worth watching. Concentration in a handful of widely held companies and sticky inflation also remain on our radar screen of outstanding risks.
Despite these risks, we remain very bullish. Bull markets always climb walls of worry, and the current environment is no exception. We continue to believe the underlying strength of the economy — fueled in large part by the insatiable demand for AI-related capital spending — is fundamentally sound. Should that spending or recent earnings growth fade, we would expect our Risk Odometer to reflect it and our opinions to change. Until then, we believe the markets will continue to climb the wall of worry bull markets so often do.
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.
