FCWS VIEW NOVEMBER 2020 | OUTLOOK: USE CAUTION
For the third consecutive month, our Outlook remains at “Use Caution” and our Risk Odometer remains at +1. Economic fundamentals and market technicals continue to give us different signs, leaving us cautious until we witness more clarity.
Our major concern in previous months was the US presidential election. Results have not been official at the time of this writing, but the stock market, so far, has reacted favorably. For now, the most probable scenario looks to be a divided government which makes tax reform less likely, a favorable scenario for investors. Once election results become official it would not be surprising to see renewed discussions around additional stimulus, which got shelved prior to the election. Progress on additional stimulus and stable tax rates would be a positive development for the stock market.
Additional fiscal stimulus seems probable given both parties were in favor of it to some degree before the election. Hopefully, both sides can come to terms with election results and get on with negotiations because the economy needs it. Economic growth is decelerating. It grew 33% in the 3rd quarter but is projected to slow to only 1.5%[1] in the 4th quarter.
Economic deceleration along with other areas of concern is keeping our Risk Odometer muted and our outlook cautious. Elevated valuations, still high levels of volatility, and surging coronavirus cases are concerns. Surging new coronavirus cases has caused new lockdowns in the United Kingdom, Germany, and France. Cases are spiking here as well but the stock market has remained resilient. Sentiment can change quickly and with elevated valuations, it can change even faster. Caution is still warranted, and our outlook reflects this. Bull markets climb walls of worry. Our hope is it will do so again. Hope is not an investment strategy, so we will set that aside and monitor the data objectively 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 remain one of the best ways to grow your wealth. Our concern remains in the speed of the economic recovery and stock market volatility over the short-term, not the long-term prospects of stock market returns.
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.
[1] According to economists at the Conference Board (https://www.conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20October%202020.pdf)
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.
Disclosures
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.
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