Our Risk Odometer moved down 1 point from +5 to +4 in December. Our Current Outlook remained unchanged at its highest level of “Positive”. Despite the one point drop in the Risk Odometer economic growth remains robust and our thesis of a bull market remains intact.
November brought two major events which caused a one-point drop in the Risk Odometer. The first one was the breaking news of the Omicron Covid variant. This news breaking event created volatility in the markets because it was reported that the new variant was more transmissible than the Delta variant and reports that Moderna was predicting Covid vaccines would be less effective against it. That report was largely invalidated by Pfizer and others. Nevertheless, it still created uncertainty and market volatility.
The second major event was a pivot by Fed president Powell that he was retiring the word “transitory” when it came to describing inflation and said they may begin tapering asset purchases a few months sooner. This was interpreted by the markets as the Fed removing monetary accommodation a little sooner and faster than previously expected.
We do not view either of these events as significant in the near term. We view the Powell pivot to be more significant in the long-term than the Omicron variant risk, but we are not real concerned right now. We will become more concerned the Fed is much further into a rate hiking cycle. The markets have often performed well at the initial stages of a Fed rate hiking cycle. This was the case the last time the Fed hiked rates in 2018. It was not until the Fed had moved rates many times, from 0% up to 2%, did the market have a significant correction. We think we are far from that stage and take comfort that the economy continues to display robust growth.
We do not view the Omicron variant as a major risk at this point. We believe the risks are more in the headlines the news reports. Just as the Delta variant spooked the markets at the onset, it later recovered. We believe each new wave of Covid fear headlines will have less and less impact on the markets as more of the world develops immunities to it.
We continue to believe the biggest risk in the markets is rising and elevated inflation. This could cause the Fed to remove accommodation and raise rates which the markets would not like. The Fed does not want to kill the economic recovery and will be reluctant to move rates higher but elevated inflation could put them between a rock and a hard place. We are not there yet, and we would NOT view this as a significant risk until the Fed was several hikes into it.
Overall, we remain positive on the markets. We understand sentiment and valuations are high which has led to several sudden market corrections recently, but we view them as normal and opportunistic.
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 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.
FC Wealth Solutions and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
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.