Market Risk Report as of August 3, 2020

From Chief Investment Officer Tom Veale,
“Let’s start with the Market Risk Indicator’s graph:”


“As you see, nothing seems to be moderating here. The MRI rose another point to 34 which is now solidly in the bearish territory. The MRI Oscillator is +5 indicating continuing upward pressure on risk. Three components rose in their risk range while just one declined. Two remain bearish while two are neutral.

It’s never pleasant to have rising market indexes as the MRI is beginning to worry about market risk. The two components at bearish levels are the Relative Valuation and Speculation Indexes. To a degree both can be blamed on a handful of very large company stocks sporting high P/Es and significant price gains since the March, 2020 Lows. Here’s how those two components look together:”


“While it appears that the Speculation Index is beginning to moderate there seems no relief for the Relative Valuation Index. Earnings Season has not provided any improvement in the market’s general Price/Earnings level. (Value Line’s median P/E is currently 22.0) We would like to see that P/E value drop back closer to 20 if current interest rates remain steady. We’re also monitoring the Consumer Price Index for signs of inflation. In recent times the 13 Week Treasury Coupon Rate’s annual return has been well below the CPI indicated inflation. This is contrary to most of the last 50 years of market history. Usually short term interest rates are higher than inflation. We are seeing the price of Gold/Precious Metals rise to levels not seen since August of 2011. Is this a reflection of real inflation or just defensive posturing because of C-19 and civil unrest?

Economic recovery from C-19 has not spread consistently throughout the country or the economy. Air Travel is still at a fraction of typical levels and seems to change with daily virus reports. Freight tonnage by the nation’s trucking companies has risen back toward more normal levels but is also inconsistent. We continue to monitor both economic and market activities as C-19 recovery continues.”

 

The Market Risk Indicator is an assessment tool that serves as a guide through all markets as to the prudent use of a liquid cash cushion. It helps determine an approximation of the amount of cash reserve relative to a diversified equity portfolio. (this is depicted by the graph above)
At times of high risk in the market, the MRI will suggest a higher level of cash reserve. At times of low market risk, the MRI will suggest a lower level of cash reserve. This investment process helps to measure and manage market risk.
Because of this, the fear associated with the uncertainty of the market can be replaced by the security of a sound investment strategy.

 

 

 

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