2021 | August Risk Odometer
FCWS View August 2021 | Outlook: Positive
Special Note About a Change in the Risk Odometer: We have changed our Risk Odometer from seven underlying indicators to five. This will not have an impact on the net takeaway or our “Current Outlook”. We dropped the Sentiment and Reportable Positions indicators. Removing them had only a 1% impact on our Risk Odometer Outlook when analyzing historical readings dating back to 1987.
Our Risk Odometer moved higher in August to +5, the highest level possible and the highest level in years. The Current Outlook remain unchanged at its highest level of “Positive”. The economy continues to run red hot as life in the US returns to normal post Covid.
From a long-term perspective, our indicators are not detecting any risk warnings. This “good as it gets” reading whereby all indicators are positive is a very welcome sign from a long-term perspective. Short-term price action can act very differently from long-term perspectives, though, so one needs to be careful over the short-term when things appear “as good as it gets”. Markets are humbling, and we caution investors not to take unnecessary risk when things appear too good. Do not mistake short-term warnings for long-term opportunities though. We would view any short-term volatility as opportunistic unless something unforeseen changes.
Although our Risk Odometer does not show any warning signs, our biggest concern has been the Fed changing their extremely accommodative policy. In June they gave their first hint they are beginning to talk about removing the accommodation but have yet to act. When they do, they have stated it will be very slow and gradual so as not to disrupt the economy.
With the economy and markets building momentum, it is difficult to foresee what is going to derail it in the near-term. We are watching the Federal Reserve closely for further hints of a change in policy and how it might impact the markets. The rise in inflation and whether it is transitory or structural remains their main concern. They have repeatedly said they believe it is transitory. Inflation expectations and wage growth will be key factors. We believe 6-9 months should provide more clarity.
We remain positive on the markets. We understand sentiment and valuations are high which can lead to sudden market corrections, but we would view them as normal and opportunistic at this stage when they inevitably materialize. This has been and will remain our stance unless inflation appears to be structural, the economy loses momentum and/or the Fed changes their policies. Those do not appear on the horizon over the short-term.
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 and volatility. Its score can range from +5 to -5. 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.
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.