Happy New Year to our Risk Odometer readers! We hope everyone had a great holiday season and off to a great 2022. Our Outlook for the beginning of 2022 remains at its highest level of “Positive”. Our Risk Odometer moved back up from +4 to +5. It has been waffling back and forth between 4 and 5 because of elevated volatility readings. This does not concern us because it has been unconfirmed by other risk warnings.
Last month we discussed two major events that had the possibility of moving markets, the outbreak of the Omicrn Covid variant and the Powell Pivot, when Fed Chairman Powell dropped the word “transitory” when describing inflation.
We do not believe the Omicron variant will be a major risk. Initially, the market stumbled on the release of the variant, but it was short-lived. We believe the risks of Omicron are more in reacting to news headlines than an economic impact. Because of the lower severity of the variant and higher transmission rates, we could see it creating a more positive environment for risk assets because it creates higher levels of herd immunity without draconian health and economic outcomes.
As for the Powell Pivot, Chairman Powell confirmed this more aggressive tone of reducing monetary accommodation at the December Federal Reserve meeting. At that meeting, he outlined a faster pace of reducing asset purchases and three rate hikes by the end of 2022. Although this was more aggressive then previously outlines, the markets did not falter.
We believe removing asset purchases and higher rates to be a real risk but given the slow pace of both, we believe the market can continue to rally in the face of this headwind. Markets tend to trade well at the onset of rate hikes. It is not until repeated rate hikes that begin to impact the economy do markets tend to struggle. That should not occur until much later in the cycle if it occurs at all this time.
We continue to believe the biggest risk in the markets is rising and elevated inflation. This could cause the Fed to remove accommodation faster and more aggressively. The Fed has remained extremely sensitive to its policies having a negative impact on the markets and are reluctant to tighten policy aggressively. Elevated inflation will be the key factor to watch in regard to whether the Fed can maintain market sensitive policies.
Overall, we remain positive on the markets. We think 2022 could experience more volatility given the removal of monetary accommodation. We would view that volatility as normal and opportunistic so long as risk factors remain muted as they are today, and inflation does not hamper the Fed’s policies.
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.