Our Risk Odometer remains unchanged in October at -2. Our Current Outlook also remains unchanged at the lowest level of “Defensive”. Our outlook moved lower to Defensive last month when our fundamental indicators began to align with our technical indicators giving us more clear risk warnings. Negative sentiment is fairly engrained in the current environment so we would expect to maintain a cautious tone until the markets improve or the Fed begins to reduce their rate hikes.
Last month was the worst month of the year for both stocks and bonds in what had already been a challenging year. The cause of the recent weakness was the dire projections by the Federal Reserve at their meeting in September. The Fed called for higher chances of an economic hard landing if their newly updated projections came true. Why the markets place much emphasis on the Fed’s projection is surprising to us given their abysmal track record. Their projections only 15 months prior (June 2021) described inflation as “transitory” and called for no rate hikes in 2022. Those projections could not have been further from reality. Nevertheless, their projections were the cause of last month’s volatility.
There is an old saying on Wall Street that the stock market stops panicking when the central bank starts to panic. In our opinion, the Fed seemed to panic at their last meeting with their dire projections. It remains to be seen whether the market will follow this narrative and stop panicking. We do not share this adage because we are calling for a bottom, but we are cognizant that a lot of bad outcomes have been priced into markets and it would not take much positive information to spark a rally. We would need to see evidence of improving technical and fundamental conditions to believe any future rally was anything but temporary. We would communicate this through a change in our Current Outlook.
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. Stock markets can be very volatile over short periods of time which can cause investors to panic and make poor investment decisions. The Risk Odometer is our objective way of managing shorter-term volatility, so it does not lead us to make poor and emotional investment decisions when inevitable poor conditions 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 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.