For the third month in a row, our Risk Odometer remains unchanged at +1 in July, and we maintain our “Cautiously Positive” Outlook. We continue to witness negative fundamental indicators and positive technical indicators. Our positive technical indicators outweigh the negative fundamental indicators for now. For the past few months, we have been concerned about a turnaround in technical indicators, but this has not materialized yet. The longer our Risk Odometer remains here or if we start to witness an uptick in fundamental indicators, we will grow more confident. For now, that confidence has a cautious tone to it.
A major reason for our tepid confidence in our Cautiously Positive Outlook is entrenched negative fundamental indicators. Leading Economic Indicators have declined for fourteen consecutive months, which does not bode well for future economic growth. Current economic activity remains resilient despite the headwinds of higher rates, tighter lending conditions and elevated inflation. Many economists still predict a mild recession in the second half of this year or early next year. We continue to agree with that outlook. Current economic activity is not cooperating with those predictions which is why the stock market has been resilient this year.
Another reason for our tepid confidence is the lack of participation in this year’s stock market rally. Widely quoted stock market indices are being led by very few names. The breadth of this rally has broadened over the past month, but leadership still remains very narrow. Stock market gains led by a small number of stocks often do not have the same follow-through strength as a market led by a large number of stocks.
We strike a bit of caution with the artificial intelligence craze that has dominated markets this year and advise investors to be patient and cognizant of the prices they are paying. We believe AI will likely be a major disruptor to the technology world and some stocks will continue to notch large gains in future years. Our caution lies in the FOMO (fear of missing out) factor that causes investors to disregard the price they are paying for an investment. FOMO periods can power markets higher and last a long time, but they rarely end in the average investor obtaining riches. It was not long ago that the FOMO factor powered many cryptocurrencies to unbelievable levels in 2021 only to crash in 2022.
We want to be clear that although we have some near-term caution, we still believe the stock market is one of the best ways to grow your wealth. The boom-bust characteristics of our economy can cause the stock market to be very volatile over short periods of time. Long-term investors should view periods of volatility as opportunities to buy attractive assets at attractive prices and improve long-term returns. The Risk Odometer is our objective way of mitigating that volatility, so it does not lead us to make poor short-term investment decisions.
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.