Market Insights: Milestone Recession Risk (MRR) Level

Milestone Asset Management Recession Risk (MRR) Level

Although we have touched on this composite from time to time in past missives, we would like to formally introduce it to you here, and provide a bit more color and context as well.  The MRR Level is a composite that we have developed internally to aid us in assessing the risk of a U.S. recession occurring in the near-term.  It is comprised of ten different indicators that we believe have the best respective track records for leading a U.S. recession by months, if not quarters.  In addition, these indicators all differ greatly from each other in terms of their composition and can therefore provide us with a comprehensive outlook when viewed together.  

We have stated many times that one shouldn’t rely solely on one indicator when considering an investment strategy; however, a composite of many indicators can provide a much better insight on whether to be on 'offense' or on 'defense'.  Each indicator in our composite provides us with either a green or red light. The spectrum is then anywhere from 0/10 (ie. ten negatives) to 10/10 (ie. ten positives).  

Currently, our MRR Level is at an 8 - well into the comfortable range - and positions our current outlook as positive.  If the level hits 5, we move into a cautious stance, and any further drop below 5 puts us into greater levels of defense.  It is in these times that we would shift our overall asset allocation to a more defensive stance.  We say 'overall' here, as we have different levels of asset allocation depending on a client's risk tolerance and time horizon.

Why is this important to us and to you?  The asset allocation of a portfolio accounts for the vast majority of the variability of returns, and our MRR Level is the key driver behind any large adjustments we make to our strategic asset allocation.  The reason why the MRR level is the key driver of such adjustments is due to the fact that, historically, the largest drawdowns and longest periods of volatility have existed within periods of U.S. recessions, not outside of them.  During positive cycles, there can be periods of volatility and corrections; however, it is periods of U.S. recession that can ultimately put the most serious strain on a portfolio's long-term success.  We make smaller tactical adjustments to our asset allocation from time to time (e.g. quarterly), but when this MRR level ‘flashes red’, it is our signal to be on full defense and it is in these times that you will see larger shifts occur.  

If you wish to discuss the more detailed mechanics behind the indicators in our composite, please don't hesitate to contact us.