Our Risk Odometer remains unchanged at +1 in June, and we maintain our “Cautiously Positive” Outlook. For the second month in over a year we do not have a defensive outlook as our timelier technical indicators remain positive. We remain doubtful we will stay with this more positive outlook given the fickle nature of our positive indicators and the entrenched negative signals from our more stable fundamental indicators. Nevertheless, the longer we spend with a net positive reading in the Risk Odometer, or if we see improvements in the more stable fundamental indicators, the more confident we will get.
The reason for our tepid confidence in our Cautiously Positive Outlook is entrenched negative fundamental indicators. Fundamental indicators are more stable than their technical counterparts, which are more short-term in nature. Leading Economic Indicators have declined for thirteen consecutive months, which does not bode well for future economic growth. Current economic activity has been resilient, and the labor market remains unusually strong given the negative headwinds of higher rates 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. The widely quoted stock market indices heard on TV are positive for the year but are being held up by very few names. The artificial intelligence craze that sprouted this year is propping up the widely quoted indices but doing very little for the performance of most stocks. The vast majority of stocks are actually not doing well this year. Stock market gains that are manufactured by a small number of stocks often do not have the same staying power as stock market gains manufactured by a large number of stocks all positively contributing.
We strike a bit of caution with the artificial intelligence craze that has dominated markets this year. 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 empowers the get rich investor whereby they disregard the price they are paying for an investment. FOMO periods can significantly 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 for cryptocurrencies dominated news headlines in 2021 only to eventually see dramatic corrections in 2022. We advise investors to be patient and cognizant of the prices they are paying.
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 markets 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. Volatility can cause investors to panic and make poor investment decisions and damage 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.
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.