FCWS View January 2021 | Outlook: Cautiously Positive
Wednesday, 06 January 2021
Our Risk Odometer begins 2021 in the same place it was last month at +1 with a Cautiously Positive Outlook. Our net Odometer reading remains positive, but our technical and fundamental indicators are giving conflicting signals, thus keeping our outlook below its highest level.
If the economy continues to improve, we would expect the fundamental indicators to turn positive by the second quarter and give a clearer signal. A lot can happen between now and then which creates our tempered optimism. Valuations are still sky high and implied volatility is still at elevated levels, signaling potential bouts of volatility ahead.
FCWS View December 2020 | Outlook: Cautiously Positive
Thursday, 03 December 2020
For the first time since February, our Current Outlook moved into the top half our four-level grading scale. Moving from “Use Caution” where it had been for the previous three months, our Outlook moved one level higher to “Cautiously Positive”. Although our fundamental indicators and technical indicators are still sending mixed messages and the Risk Odometer remained at +1 for the fourth consecutive month, positive developments in other areas are giving us more confidence in the markets.
The reasons for our improved outlook despite an increase in Risk Odometer score is reduced uncertainty on the political front, a (likely) divided Congress and positive news on a Covid vaccine. For several months prior, political uncertainties and unknown stage 3 vaccine results were risks weighing on the markets. The passing of these events, although not a certainty yet, are now high probability known outcomes. This reduced uncertainty along with favorable seasonal months of December and January moved our outlook one level higher.
FCWS View November 2020 | Outlook: Use Caution
Friday, 06 November 2020
For the third consecutive month, our Outlook remains at “Use Caution” and our Risk Odometer remains at +1. Economic fundamentals and market technicals continue to give us different signs, leaving us cautious until we witness more clarity.
Our major concern in previous months was the US presidential election. Results have not been official at the time of this writing, but the stock market, so far, has reacted favorably. For now, the most probable scenario looks to be a divided government which makes tax reform less likely, a favorable scenario for investors. Once election results become official it would not be surprising to see renewed discussions around additional stimulus, which got shelved prior to the election. Progress on additional stimulus and stable tax rates would be a positive development for the stock market.
Additional fiscal stimulus seems probable given both parties were in favor of it to some degree before the election. Hopefully, both sides can come to terms with election results and get on with negotiations because the economy needs it. Economic growth is decelerating. It grew 33% in the 3rd quarter but is projected to slow to only 1.5% in the 4th quarter.
 According to economists at the Conference Board (https://www.conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20October%202020.pdf)
FCWS View October 2020 | Outlook: Use Caution
Monday, 19 October 2020
Our outlook for October remains unchanged at “Use Caution”. Our Risk Odometer also remained unchanged on the month at +1. Economic fundamentals and market technicals continue to give us different signs, leaving us cautious until we witness more clarity.
High valuations, slowing economic improvements, fading fiscal stimulus, and an upcoming presidential election remain our concerns. The list is not short which is why we are tilted toward caution. We welcome the recent economic improvements but are concerned about how long they can be sustained without additional stimulus from Capitol Hill. Additional stimulus and clarity in Washington should turn our indicators more positive and brighten the outlook.
The market's focus over the next few months is going to be the presidential election. We believe the outcome remains too difficult to predict given how the polls failed in 2016. If the results get contested in the courts, the uncertainty could last even longer. We think caution is warranted until there is more clarity around the presidential outcome and expect bouts of volatility in the meantime.
FCWS View September 2020 | Outlook: Use Caution
Tuesday, 08 September 2020
Our Risk Odometer ticked up one level from 0 to +1 for September, but our Current Outlook remained stable at “Use Caution”. While the economy has continued to improve it remains far from where it was prior to the pandemic shutdown. The growing divide between the economy and the markets continues to remain extremely wide. The markets relentless pursuit higher remains at odds with many other global markets and is being led by fewer and fewer companies, giving us reservations about the outlook for sustainable gains. We welcome the recovery but remain cautious over the short-term.
Recent market gains have now propelled the markets to near-record valuations, measured by Price-to-Earnings Ratio (PE Ratio, left chart) and Cyclically Adjusted Price-to-Earnings Ratio (CAPE Ratio, right chart). Current valuations have never been this elevated other than the 2000 stock market mania. Valuations are not great timing tools because they can remain extreme for a long time, but they do provide perspective on current conditions relative to history. For this reason, it gives us some level of caution. Absent this, our Outlook would be one level higher.
FCWS View August 2020 | Outlook: Use Caution
Tuesday, 04 August 2020
Our Risk Odometer for August remained unchanged at 0, and our Current Outlook also remained unchanged at “Use Caution”, thereby keeping us with a defensive bias. Although these remain unchanged, our opinions on the markets have not. The growing divide between the economy and the stock market appears wider than ever before, and this raises concern for us as stewards of our client’s capital.
The economy is not the stock market nor is the stock market the economy. While the two usually track each other, they appear at dramatic odds today. The economy contracted at a 33% rate in the second quarter and unemployment is currently over 11%. The economy has dramatically come back since the worst of the pandemic but is still years away from fully recovering. Our country has been one of the hardest hit by the virus and new cases are on the rise. Economic reopening plans are moving backward and there is a presidential election four months away, one in which the incumbent president is trailing in the polls. All of this creates economic uncertainty.
The US stock market, on the other hand, has recovered most of the losses since the start of the pandemic. Some sectors such as energy and financials remain well off their lows, but other sectors such as technology and health care are making all-time highs. One of the broadest measures, the S&P 500, has predominately fully recovered and is nearing all-time highs. The stock market is conveying the pandemic will pass with little more economic damage.
FCWS View July 2020 | Outlook: Use Caution
Wednesday, 08 July 2020
Our Risk Odometer moved up two notches, from -2 to 0, subsequently moving up our Current Outlook from “Defensive” to “Use Caution”. Although the outlook has improved, it remains in a defensive stance, and caution is still warranted.
The economy has dramatically improved over the past two months, but it remains far from full recovery. Recent stock market gains have created a newfound level of optimism, but there are still major headwinds. Coronavirus cases on the rise and reopening plans are being reevaluated. Early presidential election polls are showing Trump will have a formidable reelection challenge ahead of him which creates fiscal uncertainty. Federal unemployment benefits ($600 per week) are set to expire in July and the Paycheck Protection Program (PPP) grants have now predominately run their course. These concerns along with very optimistic valuations warrant a cautious stance.
FCWS View June 2020 | Outlook: Defensive
Wednesday, 03 June 2020
For the 3rd consecutive month, our Current Outlook remained at our lowest level of “Defensive”. Our Risk Odometer reading did move up one notch from -3 to -2 this month as our Technical Price Action Indicator turned positive. Improving stock market prices turned our Technical Price Action Indicator positive, but this optimism continues to be outweighed by our negative fundamental indicators. Our Outlook reflects both technicals and the fundamentals, and the fundamental warnings dominate at the current stage, thus keeping our outlook defensive.
Last month, we mentioned the disconnect between the recent stock market rally and the economic data. That disconnect grew wider in May. The S&P 500 has now recovered nearly 75% of its losses and is down only 5% on the year at the time of this writing. We find this resiliency and optimism remarkable given 15% unemployment we are experiencing today. The current levels of the S&P 500 are now back at levels we saw in late 2019 when unemployment was 3.5%!
FCWS View May 2020 | Outlook: Defensive
Thursday, 07 May 2020
Our Risk Odometer moved deep into negative territory to -3 and our Current Outlook remains at our lowest level of “Defensive” for the 2nd consecutive month. The economic and earnings data we are witnessing is, not surprisingly, extremely negative and will likely remain negative for the near future. The stock market, though, has recently rallied strongly from the lows seen in late March, puzzling many economists and market strategists. Economic data and the stock market outlook seem to be at odds. We have fielded many questions about this difference and our stance is two-fold.
We believe both can be correct. In our opinion, the markets appear to be optimistic about the belief and speed of the recovery. We believe, in the long-run (i.e. measured in years), the economy will fully recover, and for that reason, we believe the optimism of the markets is justified.
FCWS View April 2020 | Outlook: Defensive
Monday, 06 April 2020
For the 3rd consecutive month, we have moved our Current Outlook down another level to “Defensive”, the lowest of four possible levels. The downgrade comes as significant price deterioration in the stock market turned our Technical Price Action negative, moving the overall Risk Odometer score to zero.
Given the lag of Economic Indicators and Earnings indicators, I would expect the overall score to turn negative in the months ahead, keeping our Outlook Defensive. We are not expecting this situation to end quickly and are advising our clients to be cautious and maintain a long-term perspective.
FCWS View March 2020 | Outlook: Use Caution
Friday, 06 March 2020
We are moving our Current Outlook down one notch again for the second consecutive month, from “Cautiously Positive” to “Use Caution”. This is one level above our most cautious outlook. The downgrade in our Current Outlook was due to our Risk Odometer reading moving from +2 to +1, caused by our more market-sensitive indicators.
FCWS View February 2020 | Outlook: Cautiously Positive
Wednesday, 05 February 2020
We have moved our Current Outlook down one notch, from “Positive” to “Cautiously Positive”. Although the coronavirus has caused volatility and fear to start the year, this is not the reason for the downgrade in the outlook. The downgrade was caused by something much more concerning…weakening fundamental indicators.
FCWS View January 2020 | Outlook: Positive
Monday, 06 January 2020
Happy New Year to all our readers! I hope everyone had an enjoyable holiday season. In terms of the markets, 2019 could not have been more different from 2018, as almost every asset class experienced positive returns. Trade war headlines dominated the news in 2019, but the Federal Reserve’s three rate cuts were the dominant force behind the stock market rally. Even the bond market participated with outsized gains. It was truly a remarkable year.
FCWS View December 2019 | Outlook: Positive
Tuesday, 03 December 2019
This month, we are introducing a new format to our Risk Odometer. Our Current Outlook Table to the right of the odometer now shows 4 categories: Positive, Cautiously Positive, Use Caution and Defensive. Our current stance will be highlighted while the other levels will be grayed out. This change was designed to show where we currently stand relative to the different possible outlooks.
For the second consecutive month, our Current Outlook remains “Positive”. Our net Risk Odometer score moved down one notch from +5 to +4 this month. The small change in the net score is merely noise.
FCWS View November 2019 | Outlook: Positive
Monday, 04 November 2019
For the first time since May, we are changing our Current Outlook from “Cautiously Positive” to “Positive”. This upgrade is the result of improvements in Technical Price Action, notably from improvements in international markets. Global equity markets appear to be rising in sync with domestic equity markets, an important development in how the Risk Odometer views risk.