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2020 | March Risk Odometer

FCWS View March 2020 | Outlook: Use Caution

2020 |  March Risk Odometer

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. 

The fears of the coronavirus have soundly reverberated across our markets.  The long-term economic impact is still highly uncertain at this stage, but we are seeing its effects on the timelier risk factors we monitor.  Market volatility can be scary in the short-term, but from a big picture perspective, our Risk Odometer remains in positive territory.  At the time of this writing, 6 out of 7 indicators we monitor are producing neutral signals, with one still on a positive signal.  We are not sounding the alarm bells but with a lack of positive signals, and others near inflection points, we remain open to change in either direction.  The majority of our tactical growth strategies remain invested in stocks, but we have made some small defensive steps considering the evolving situation. 

The risk factors that caused the Risk Odometer changes were rapid deterioration in stock market prices and an increase in volatility.  Stock market prices (i.e. Technical Price Action) can be misleading, but they have also been reliable and timely signals at other times.  Volatility is also a rapidly changing variable, but it too has also been effective and reliable at times.  These timely signals can be a double-edged sword, which is why we believe looking at them in conjunction with other risk factors produce more reliable signals. 

In the current environment, we remain open to various outcomes.  Historical instances of global disease outbreaks and other unforeseen economic casualties have often resulted in short-term losses but ‘V’ shaped recoveries once fear resides and pent-up demand is released.  Only hindsight will tell us if the same occurs this time, but history does tend to repeat itself.  Whether it repeats this time and where the bottom lies, is unknown, which is why we remain open-minded.

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 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. 

Disclosures

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.

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Mike Fickell

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