For the first time since 2020, our Risk Odometer has moved into negative territory at -2 and our Current Outlook downgraded to its lowest level of “Defensive”. For four consecutive months we had been witnessing conflicting signals giving us a net zero score. We are now beginning to see an alignment in in both technical and fundamental risk indicators, giving us greater caution and downgrading our outlook.
Markets had been improving for a several months until Chairman Powell’s speech in mid-August threw cold water on it. In that speech, Powell expressed that reducing inflation was more crucial than supporting growth which could cause some pain to households and businesses in the near term. Following that speech, the bear market, which began earlier this year, reared its ugly head again. Our indicators, which had been expressing some caution ahead of this speech, are now expressing more aligned risk warnings.
In this environment we try to be more cognizant of preserving capital by reducing and diversifying our risk and finding ways to hedge core equity positions in order to reduce downside losses. We stress reduce not eliminate. We do not expect to eliminate losses but instead seek to reduce them so that we can maintain our longer-term investment plan.
We want to be clear that although we remain on heightened alert for further downside risk, it is by no means a certainty. We manage money based on probabilities. We will never have certainty of any future event, but we can prepare for them if we believe the probability has risen. Our indicators lead us to believe it has. We envision volatility remaining high until the Fed would signal a pause in raising rates and/or tightening financial conditions, or if we see positive signs in our leading technical indicators.
We want to be clear that although our Risk Odometer is defensive there are some positive things which should support markets over longer time horizons. Most importantly, the labor market remains strong and continued wage gains are offsetting some of the elevated inflation. Inflation, although still high, has been declining, and gasoline prices have fallen substantially in the past month. The economy is expected to grow 2.6% this quarter (according to Atlanta Fed GDP Now Forecast), reversing the first two quarters negative print. This should provide eventual support to the markets should they fall further. This keeps our longer-term view more optimistic than our Odometer which shows more short-term caution. We understand markets live in the short-term which is why we use our Risk Odometer to manage shorter term downside risks.
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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