2020 | June Risk Odometer
FCWS View June 2020 | Outlook: Defensive
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%!
The optimism of the market is mostly attributable to the unprecedented amount of stimulus from the government. The most remarkable stat we found was that 68% of unemployed workers receive more in unemployment benefits than what they were previously earning, and a shocking 20% are earning twice as much! With this amount of stimulus, it is not surprising that the market has recovered a large portion of its losses. As bad as the economy is, the federal government stimulus is acting as a lifeline.
The big question is how long this stimulus can last and what will the economy be like once it fades or even ends. We do not believe this level of stimulus can last forever, justifying our prudent stance. The economy will need to quickly recover to where it was prior to the pandemic to justify current prices. These concerns confirm the warning signals from the Risk Odometer.
From a long-term perspective (i.e. measured in years), we continue to believe our medical community will triumph and global stock markets will fully recover. We still believe the stock market is one of the best ways to grow your wealth over the long-term. Our concern remains in the speed of the recovery and markets over the next 3-12 months.
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.
 “US Unemployment Insurance Replacement Rates During the Pandemic” by University of Chicago economists Peter Ganong, Pascal Noel and Joseph Vavra
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 The Core Equity Strategy. It is composed of various indicators based on leading economic indicators, earnings, technical price action, breadth, volatility, sentiment, and reportable positions from the Commodities Futures Trading Commission. Its score can range from +7 to -7. Readings greater than 1 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.
Each investment type has different investment risk characteristics. Risk is the variability of investment returns.
An investment in a money market fund is not insured or guaranteed and seeks to preserve the value of your investment at $1.00 per share. It is possible to lose money by investing in a money market fund.
U.S. Treasury bonds are guaranteed as to the timely payment of principal and interest.
TIPS offer a lower current return to compensate for the inflation protection. TIPS are tax inefficient and should belong in tax-deferred accounts.
Tax-exempt municipal bonds offer the opportunity to maximize your after-tax return consistent with the amount of risk you're willing to accept. Municipal bonds offer a higher net yield to investors in higher tax brackets. Municipal bonds may be subject to AMT.
Corporate bonds are considered higher risk than government bonds. Corporate bonds have higher interest rates than government bonds. The higher a company's perceived credit quality, the easier it becomes to issue debt. High yield bonds experience higher volatility and increased credit risk when compared to other fixed income investments.
Bonds have fixed principal value and yield if held to maturity. Prices of fixed-income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.
REITs do not necessarily increase and decrease in value along with the broader market. However, they pay yields in the form of dividends no matter how the shares perform based on different criteria than stocks.
Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks generally are more volatile than those of large company stocks. Growth stocks are more volatile than value stocks.
International investing involves special risks not found in domestic investing, including increased political, social and economic instability. Investing in emerging markets can be riskier than investing in well-established foreign markets.
The price of physical materials is subject to supply and demand.
It is not possible to invest directly in any index. The performance of an unmanaged index is not indicative of the performance of any particular investment. The performance of an index assumes no transaction costs, taxes, management fees or other expenses. Past performance does not guarantee future results.
Sector investing that concentrate its investments in one region or industry may carry greater risk than more broadly diversified investments.
There is no assurance that by assuming more risk, you are guaranteed to achieve better results.
Historical performance relative to risk and return points to, but does not guarantee, the same relationship for future performance.
Diversification through an asset allocation plan is a useful technique that can reduce overall portfolio risk and volatility. Diversification neither ensures against a profit nor protects against a loss. Diversification offers returns which are not directly related over time and is intended for the structure of a whole portfolio to reduce the risk inherent in a particular security.
Data Source: YCharts
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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.