Our Risk Odometer is unchanged for June at net score of zero and a “Use Caution” Outlook. This more cautious outlook reflects the conflicting signals our indicators are giving us. Our more-timely technical indicators continue to display caution while our longer-term fundamental signals remaining positive. Until this conflicting battle finds a winner, we will have some degree of caution and uncertainty in our outlook.
In mid-May, the S&P 500 briefly dipped into “bear” market territory, defined as a 20% loss from its high. The bear market level was reached on an intraday basis, but the market recovered later that day and closed above it, so technically, it is not a bear market yet.
In our opinion, it will be difficult for the stock market to sustain losses much greater than the 20% bear market level unless a recession is more imminent. This is because the 20% drop makes the stock market appear cheap which brings out new buyers. This is all assuming the economy would not be headed toward an imminent recession and/or new risk factors emerge.
We admit that the economy is definitely slowing, but we do not view a recession as imminent, nor is it our base case, so we find value in today’s stock market prices, especially if there were to approach the lows from mid-May. We would view the lows seen in mid-May as closer to the bottom of short-term range which we believe could transpire over the next several months or quarters. We are not calling a market bottom today nor stating the absolute lows were levels reached in May. Instead, we view current prices, and especially those seen earlier in May, as good value and good reward compared to risk.
We believe the Fed’s change in interest rate policy will be the most dominate event for the next several years. Rising interest rates will create a headwind for the markets. We believe this will structurally keep volatility higher and mute equity returns going forward until they reach a level that will reduce inflation. 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.
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.