Our Risk Odometer remained unchanged for December and our Outlook remains “Defensive”. The stock market experienced a considerable rally in October and November, triggering our Technical Price Action to turn positive, but this was not enough to offset other negative indicators we monitor. Technical Price Action is a leading indicator and would be the first indicator we would expect to turn positive on an eventual improvement in our Outlook. Given our ensemble weight of the evidence approach, we do not have enough evidence to change our outlook from Defensive, but it does raise some early hope.
For the sake of our clients, we hope this early hope gains traction, but we are doubtful in the near term. The economy continues to decelerate. Monthly readings in our Economic Indicators have declined eight consecutive months, a rare occurrence. Adding to those concerns is the inversion of the yield curve, whereby short rates are significantly higher than long rates. This inversion of the yield curve is very rare and has occurred prior to the start of the last eight recessions in the US.
We view the recent improvement in technical price action as seasonally driven and hopeful of an economic soft landing rather than a recession. We believe we are likely to experience a recession in 2023 rather than a soft landing, but if this recession is a mild one, which we believe is more likely than a deep recession, then we would argue the lows of the stock market are behind us and not in front of us. We could see a period of volatility ensuing over the next few months or quarters that could cause the markets to move towards the September lows or even pierce them, but we would view prices that low as a long-term buying opportunity.
Our feeling is that a mild recession is more likely than a deep recession given the strength of the labor market and reduced supply of labor. Without severe job losses, which we believe is more likely given the lack of labor supply, we have a hard time seeing a severe recession. Without a severe recession, we would not expect to have severe stock market losses. We have already experienced a 25% drop in the S&P 500, which we believe was reflective of a mild recession. This is why we believe the lows of the market are behind us rather than in front of us.
We wish we had a crystal ball that would tell us if our mild recession prediction will come true. Unfortunately, we do not. We defer to following facts rather than predictions, therefore, remain defensive until we get some positive signs from our Risk Odometer.
We want to be clear that although our Risk Odometer is defensive, we are still a long-term believer that the stock market is one of the best ways to grow your wealth. The boom-bust characteristics of our economy can cause the stock markets to be very volatile over short periods of time. Volatility can cause investors to panic and make poor investment decisions. The Risk Odometer is our objective way of managing that volatility, so it does not lead us to make poor short-term investment decisions impacting our long-term 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.
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 one 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.