Broker Check
2022 | November Risk Odometer

2022 | November Risk Odometer

November 10, 2022
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Our Risk Odometer net score moved up one point for November to -1 but still remains in negative territory.  Our Outlook remains “Defensive”.  The improvement in our net score was due to improved Technical Price Action in October, but the majority of the indicators still point to caution ahead.   Negative sentiment remains engrained in the current environment, so we expect to maintain a cautious tone until markets improve further or the Fed reduces rate hikes.

Although the markets have recently recovered, the economy continues to show signs of weakening.  Labor markets remain resilient and the economy is still growing, but inflation continues to remain high and sticky and the Federal Reserve’s relentless pace of interest rate hikes are starting to take a bite on economic activity.  Leading Economic Indicators have been in a persistent downtrend and suggests a recession is increasingly likely. 

The big question on our mind is not if the economy will experience a recession, but whether the recession will be mild or severe.  Although we have not experienced a recession yet, we believe this year’s market losses have already priced in a mild recession.  If the economy were to only experience a mild recession then we would argue the lows in the stock market are behind us.  Yet if the pace of economic activity accelerates further to the downside, and job losses are more severe than most are expecting, the lows of the stock market are likely ahead of us.  Economists are split on this question. 

The big question on our mind is not if the economy will experience a recession, but whether the recession will be mild or severe.  Although we have not experienced a recession yet, we believe this year’s market losses have already priced in a mild recession.  If the economy were to only experience a mild recession then we would argue the lows in the stock market are behind us.  Yet if the pace of economic activity accelerates further to the downside, and job losses are more severe than most are expecting, the lows of the stock market are likely ahead of us.  Economists are split on this question. 

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 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.

Disclosures

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.

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