Stocks: Stress Indices Tell Us When to Worry
With the Composite Indicator of Systemic Stress at an all-time low, does that mean we can kick back and relax?
- Cleveland Financial Stress Index
- Chicago Fed Financial Conditions Index
- St Louis Fed Financial Stress Index
- Kansas City Fed Financial Stress Index
spreads, asset correlations, liquidity demands, systemic leverage, and more.
They're all essentially bounded from +2 (extremely high stress) to -2 (extremely low stress), with 0 being the baseline.
Typically, when the average gets near +1, we're at "the world's gonna end" kind of sentiment. When it gets to +3, that's pretty much the apocalypse, but inevitably, stocks bounce back.
When the average gets near -1, we're at "the country's firing on all cylinders, full speed ahead!" Whatever is beyond that is where we are now; the Composite Indicator of Systemic Stress (CISS) just hit a new all-time record low.
A few days ago, the Composite hit a level of -1.21, which has never been matched. It has approached -1.0 four other times: February/March 1977, August 1993, April/October 2006, and January/February 2007.
Of the 68 days the index has neared that level, the one-year return in the S&P 500 (INDEXSP:INX) was positive 29% of the time with a median return of -6.4%.
To be fair, the Composite was low, below -0.5 but not beyond -0.95, during much of the mid-1990s, and stocks rallied massively. But usually, the time to worry is when there is nothing to worry about.
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