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2021 | September Risk Odometer

FCWS View September 2021 | Outlook: Positive

2021 |  September Risk Odometer

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 remained at its highest level possible in September at +5.  The Current Outlook remained unchanged at its highest level of “Positive”.  The economy remains strong, and the markets continue to trade well.

 With no risk warnings from our indicators and the market trading higher for 7 consecutive months, we worry that things are “as good as it gets”.  These scenarios often precede short-term corrections, so we caution investors about taking unnecessary risk in these environments.  We do not advocate trying to pick the top, but rather prepare and expect for the potential volatility, and use it as an opportunity.  Our long-term outlook remains very optimistic.

Although our Risk Odometer does not show any warning signs, our biggest concern has been the Fed changing their extremely accommodative policy.  At the annual Jackson Hole Conference, the Fed suggested they would begin to taper their bond purchases later this year but that rate hikes were not in the near-term.  The markets took this as a positive sign and rallied on the comments.  We believe that until rate hikes become a near-term reality, the markets will continue to grind higher.

The big debate at the Fed remains whether inflation is transitory or not.  The Fed believes it is and this is why they remain accommodative.  We are skeptical of this opinion and have positioned portfolios in case they change their opinion.  Regardless of whether the Fed is correct or not, we believe the risk of inflation remaining high outweigh the costs of not protecting against it. 

In the near-term it is difficult to see what would derail the current “as good as it gets” environment.  We understand sentiment and valuations are high which can lead to sudden market corrections, but we would view them as normal and opportunistic 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 proprietary investment strategies.  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. 


 

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.

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.

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Mike Fickell

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