Our Risk Odometer improved in April, with our net score moving up from +1 last month to +2 and our Current Outlook improving one level higher to “Cautiously Positive”. Our Risk Odometer has moved from +5 in January down to +1 in March and now back up to +2. This movement in our Odometer is more than normal but not surprising given recent volatility in the stock market.
This month’s improvement arises from an improvement in price of the stock market, which surprisingly bottomed just after the Russian invasion of Ukraine. We expect the market to remain volatile for the near-term. We take comfort that the US economy is still expected to grow above trend and pre-pandemic rates, which we think creates support to future sell-offs, if they materialize. Our fundamental indicators remain positive and confirm these expectations.
The Russian invasion of Ukraine, which dominated the headlines last month and caused a lot of market volatility, has been waning in its impact on the markets. The focus is back on the Fed and its change in interest rate policy, which we believe will have a far greater impact on the markets than Russia or any other current event.
We believe the Fed’s change in interest rate policy will create a headwind for the markets going forward. We will continue to objectively measure the risks of the markets with our risk indicators, but given the rise in interest rates, we will be more sensitive to risk warnings when they arise.
Our more cautious tone, driven by higher interest rates, does not mean we believe the markets are going to enter a bear market. We believe the economy would need to enter a recession for a sustainable bear market to ensue. The economy is still experiencing above trend levels of growth, therefore we do not envision a recession anytime soon.
Markets can remain volatile, moving up and down in rapid fashion without experiencing a bear market. We believe this is a more likely scenario as the markets digest the rise in interest rates experienced so far this year. Typically, bear markets ensue much later into a Fed hiking cycle when rates are moved too high which negatively impact the economy. We do not envision that happening in the near-term and thus remain Cautiously Positive given the improvement in the Risk Odometer.
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.