First and foremost, we want to send our thoughts and prayers to the people of Ukraine whose lives have been uprooted and their liberties stripped due to the Russian invasion of their country. We pray for a safe resolution of this horrific tragedy, and we count our blessings to live in a country where we sometimes take these liberties for granted.
This year’s market volatility, first stemming from expected higher interest rates and now amplified by the Russian invasion of Ukraine, has moved our Risk Odometer one point lower, from +2 last month to +1 for March. We are also moving our Current Outlook down one level to “Use Caution”.
The move lower in our Risk Odometer puts us on heightened alert. Our fundamental indicators remain positive which gives us some comfort in a strong underlying economy. The economy is expected to grow a robust 3.5% in 2022 (Conference Board), which is above trend and above pre-pandemic growth rates. These expectations could be impacted by the Ukraine situation, but nonetheless, should provide downside support if more market volatility arises.
The indicators we follow are at odds with each other. Our technical indicators (Price Action, Breadth, and Volatility) are expressing warning signals which is at odds with positive signals from fundamental indicators (Economic Indicators, Earnings). Technical indicators often show warning signs before fundamental indicators, therefore are considered leading indicators. Leading indicators have higher probabilities of generating false signals. This is why we monitor both technical and fundamental indicators. Confirming signals are more reliable than unconfirmed ones. We do not ignore unconfirmed signals, but we are slower to react to them.
The economic developments resulting from the Russian invasion will be closely watched for a deterioration in our fundamental indicators, especially now that technical indicators are showing warning signals. It is too soon to know how impactful the Russian invasion will be on our economy. We are confident that it will prolong the ongoing supply chain problems, which should create higher levels of inflation for longer periods of time. Higher prices will eventually slow our economy. Those signals will likely take 3-6 months to show up in data. We will be watching it closely for its impacts on the markets.
The markets will remain volatile until we get some resolution in Ukraine. It does not appear that is in the near-term as Putin has increased his offensive on Ukraine. It did not make economic sense for Russia to invade Ukraine and now the Russian economy is being dramatically impacted by the extreme economic sanctions the world is levying on them. We would expect these sanctions would have an impact on Putin’s decisions, but when decisions are being made by a single person without sanity or economic common sense, it makes projecting outcomes challenging. This is why we believe the markets remain volatile over the near term.
Overall, we remain on heighted alert which is why we downgraded our outlook to “Use Caution”. We were expecting higher volatility this year as the Fed was expected to raise rates. We have clearly gotten it. As long-term capital market investors, there is a degree of volatility that we must expect. We would put the current volatility within those expectations. We put solace in strong economic fundamentals which we believe should mitigate downside volatility but will monitor for continued risk warnings in order to protect against greater levels of volatility.
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.