2024 | October Risk Odometer

Our Risk Odometer remained unchanged at +3 in October with the Current Outlook also unchanged at Positive. There have been minor changes throughout the year in the Risk Odometer’s net score, but they have been perceived as noise. The Current Outlook, which is typically steadier, has remained constant at its highest outlook of Positive. It has been Positive all year.

The major event in September was the Federal Reserve’s first rate cut reduction since Covid. The rate reduction was expected but the size of it surprised many. Reducing the target rate by 0.5% was bigger than the Fed typically cuts outside of a rapidly deteriorating economy. We are expecting a series of additional rate reductions over the next year which should provide a tailwind to the equity markets. The Fed’s official projections are calling for an additional 0.5% reduction this year and 1.0% next year, taking their target rate down to 3.25%.

Often times the Fed reduces rates because markets are in duress or to avoid a pending recession, making them symptomatic of equity bear markets. We do not believe that to be the case this time though. Nevertheless, we are closely monitoring for signs of deteriorating economic conditions because it would dramatically change our outlook.

As we draw closer to the US Presidential election next month, we often get people asking us whether it impacts our outlook. Our simple answer is “No.” The outcome of the election may have meaningful impacts on some sectors or individual stocks, but from a big picture perspective, it will not change our outlook either way. This is because we do not believe either candidate will be bad for the markets. What is more important is the health of labor markets and the amount and pace at which the Fed reduces rates. For now, the labor market remains healthy, and the Fed has plans for additional rate cuts, both of which are fundamentally good for the markets. Because of this and because of the lack of risk signals from our Risk Odometer, we remain positive on the markets.

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.