Our Risk Odometer remained unchanged at +3 and our outlook at “Positive” for June. The Risk Odometer net score briefly moved lower earlier this year, but our outlook remained “Positive” throughout it where it remains today. Stable and consistent “Positive” outlooks are common during bull market cycles like we are witnessing.
The stock market witnessed heightened volatility in the beginning of June, but it was not great enough to downgrade our outlook. The fundamental backdrop for the stock market continues to be supportive. Earnings in the most recent quarter were extremely strong, and the labor market showed recent signs of a pick-up in hiring after cooling in the first quarter.
Supporting the positive fundamental backdrop is what seems to be never-ending AI capex spending plans. With the staggering spending plans that only seem to increase, it makes it difficult to see what turns this stock market significantly lower. In our opinion, it would have to be something related to a reduction in AI capex spending. We are not currently witnessing it but inevitably will one day. Until it does, we think it provides an economic tailwind that creates a floor for future market selloffs.
Unforeseen volatility could result from a change in leadership at the Federal Reserve. In May, Congress voted Kevin Warsh to succeed Jerome Powell, who held the position for eight years. The transition to Warsh’s leadership at the Fed introduces significant market uncertainty, as investors scramble to decode the new chair's economic philosophy. This natural friction is amplified by inflationary pressures signaling a need for higher interest rates while President Trump is publicly demanding rate cuts, trapping his hand-picked nominee into a quagmire from day one. The markets will be anxiously awaiting Warsh’s stance on interest rates at his first meeting as head of the Fed later this month.
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 our 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 one are positive and readings less than or equal to zero are negative.
