FCWS VIEW AUGUST 2020 | OUTLOOK: USE CAUTION
Our Risk Odometer for August remained unchanged at 0, and our Current Outlook also remained unchanged at “Use Caution”, thereby keeping us with a defensive bias. Although these remain unchanged, our opinions on the markets have not. The growing divide between the economy and the stock market appears wider than ever before, and this raises concern for us as stewards of our client’s capital.
The economy is not the stock market nor is the stock market the economy. While the two usually track each other, they appear at dramatic odds today. The economy contracted at a 33% rate in the second quarter and unemployment is currently over 11%. The economy has dramatically come back since the worst of the pandemic but is still years away from fully recovering. Our country has been one of the hardest hit by the virus and new cases are on the rise. Economic reopening plans are moving backward and there is a presidential election four months away, one in which the incumbent president is trailing in the polls. All of this creates economic uncertainty.
The US stock market, on the other hand, has recovered most of the losses since the start of the pandemic. Some sectors such as energy and financials remain well off their lows, but other sectors such as technology and health care are making all-time highs. One of the broadest measures, the S&P 500, has predominately fully recovered and is nearing all-time highs. The stock market is conveying the pandemic will pass with little more economic damage.
We hope the stock market is correct and the economy comes around to what the markets are expecting. Hope is not an investment strategy, though, so we must set aside our hopes and remain objective. For now, poor economic data and extreme valuations keep us cautious. If the economic data and company earnings continue to recover, we will gladly change our outlook. We have witnessed some early signs but not enough yet to change our outlook. We would like to see a further recovery in either economic indicators or earnings, which would confirm the positive technical indicators, before changing our outlook.
Our caution has always been from a short-term perspective (3-12 months). From a long-term perspective (i.e. measured in years), we continue to believe our medical community will triumph and global stock markets will fully recover. We still believe the stock market is one of the best ways to grow your wealth over the long-term. Our concern remains in the speed of the economic recovery and stock market volatility over the short-term.
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 The Core Equity Strategy. It is composed of various indicators based on leading economic indicators, earnings, technical price action, breadth, volatility, sentiment, and reportable positions from the Commodities Futures Trading Commission. Its score can range from +7 to -7. Readings greater than 1 are positive and readings less than or equal to zero are negative.
This information does not have regard to the specific investment objectives, financial situation and the needs of any specific person who may view this information. Statements, opinions and forecasts made represent a particular observation and assessment of the market environment at a specific point in time and are not intended to be a forecast of future events or a guarantee of future results. Statements regarding future prospects may not be realized and may differ materially from actual events or results. Past performance is not indicative of future performance.
Each investment type has different investment risk characteristics. Risk is the variability of investment returns.
An investment in a money market fund is not insured or guaranteed and seeks to preserve the value of your investment at $1.00 per share. It is possible to lose money by investing in a money market fund.
U.S. Treasury bonds are guaranteed as to the timely payment of principal and interest.
TIPS offer a lower current return to compensate for the inflation protection. TIPS are tax inefficient and should belong in tax-deferred accounts.
Tax-exempt municipal bonds offer the opportunity to maximize your after-tax return consistent with the amount of risk you're willing to accept. Municipal bonds offer a higher net yield to investors in higher tax brackets. Municipal bonds may be subject to AMT.
Corporate bonds are considered higher risk than government bonds. Corporate bonds have higher interest rates than government bonds. The higher a company's perceived credit quality, the easier it becomes to issue debt. High yield bonds experience higher volatility and increased credit risk when compared to other fixed income investments.
Bonds have fixed principal value and yield if held to maturity. Prices of fixed-income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.
REITs do not necessarily increase and decrease in value along with the broader market. However, they pay yields in the form of dividends no matter how the shares perform based on different criteria than stocks.
Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks generally are more volatile than those of large company stocks. Growth stocks are more volatile than value stocks.
International investing involves special risks not found in domestic investing, including increased political, social and economic instability. Investing in emerging markets can be riskier than investing in well-established foreign markets.
The price of physical materials is subject to supply and demand.
It is not possible to invest directly in any index. The performance of an unmanaged index is not indicative of the performance of any particular investment. The performance of an index assumes no transaction costs, taxes, management fees or other expenses. Past performance does not guarantee future results.
Sector investing that concentrate its investments in one region or industry may carry greater risk than more broadly diversified investments.
There is no assurance that by assuming more risk, you are guaranteed to achieve better results.
Historical performance relative to risk and return points to, but does not guarantee, the same relationship for future performance.
Diversification through an asset allocation plan is a useful technique that can reduce overall portfolio risk and volatility. Diversification neither ensures against a profit nor protects against a loss. Diversification offers returns which are not directly related over time and is intended for the structure of a whole portfolio to reduce the risk inherent in a particular security.
Data Source: YCharts
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Michael Fickell is an investment advisor representative of FC Wealth Solutions
Securities and investment advisory services offered through FC Wealth Solutions, a registered investment advisor.