2021 | July Risk Odometer
FCWS View July 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. These two indicators were rarely active . Removing them had only a 1% impact on our Risk Odometer Outlook when analyzing readings dating back to 1987.
Our Risk Odometer remain unchanged at an elevated +4, and our Current Outlook also 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. 2nd quarter GDP could come in as high as 9% with year-over-year growth around 6.6%[i], a rare feat for an economy as large and developed as the US.
Along with the economy, the markets continue to trade red hot. Our biggest concern has been the Fed changing their extremely accommodative policy. Last month they gave their first hint they are beginning to talk about removing the accommodation. We were concerned this would have a bigger impact on the markets, but they largely ignored it and continued higher. This tells us the market is stronger than we originally believed.
With the economy continuing to build momentum and the markets stronger than we originally believed, 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 recent 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.
[i] Forecasts from the Conference Board economists
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
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.
Please do not send any trading or transaction instructions through this email. They will not be honored or executed. Should you require immediate assistance, please call your financial advisor.
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.