Our Risk Odometer moved back up 1 point this month to its highest reading possible at +5. Our Current Outlook remained unchanged, also at its highest possible level of “Positive”. The warning sign we witnessed last month dissipated as we thought it would given the strength of our other indicators. It is fairly common to get false signals in some of our indicators. This is why we prefer using a multi-indicator approach to assessing the risks of the markets.
The markets are entering their seasonally strongest part of the year, November – January. By no means are the chances 100% but the stock market has historically rallied more often over these months. With our risk indicators all showing positive readings and momentum building in the markets, this gives us greater confidence in positive outcomes over the short-term.
The biggest risk we see in the markets is rising and elevated inflation. The Fed continues to call it “transitory”, but we have our doubts. If inflation remains elevated longer than the markets or the Fed expects, it could cause the Fed to remove accommodation faster than expected. This would negatively impact the markets. The Fed has remained steadfast in their assessment and extremely patient in terms of removing accommodation. We believe this is one of the biggest reasons the markets have done so well recently. We will continue to monitor for changes to their outlook because it would most surely impact the markets.
Whether the risk of higher inflation materializes or not, we believe the risk of not protecting against it outweigh the costs. Elevated and persistent inflation is a phenomenon markets have not experienced in a long-time. Investments in this space remains under invested which could create tremendous opportunity.
Despite our positive economic indicator, we have picked up on a recent slowdown in economic activity. We do not view this slowdown as meaningful though. We believe the slowdown was an effect of the Delta Covid variant but view it as transitory and improving. Nevertheless, we will continue to monitor for further economic slowdowns.
Overall, we remain very positive on the markets. We understand sentiment and valuations are high which can lead to sudden market corrections, but we view them as normal and opportunistic. This has been and will remain our stance unless inflation appears to be structural, the economy loses momentum and/or the Fed changes their policies. Those do not appear on the horizon in the near-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 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.