Share the Wealth – January 2, 2018
Registered Investment Adviser Caleb Lawrence
The major averages start the year with decent gains on little news. That said Bitcoin struggles out of the gate to begin the year down for the first time since 2015 as rumors swirl of account freezes. When most, if not all, of the investment thesis is based on hype, it takes little to spook the herd. A concept Elon Musk should also be mindful of.
One of the more esoteric series available from FRED or the Federal Reserve Economic Database is the Saint Louis Financial Stress Index. While off its recent nadir of -1.68 having risen to -1.46 it has been below zero since late 2009 as the previous crisis started to abate. For this index zero is considered essentially normal financial market conditions. Readings below -.8 are very low for the series based on recent history that also shows that bubbles tend to form during periods of low +1 or less as was seen in the 5 or so years prior to the Dot-Com crisis. The 5-years prior to the last crisis of 2007-2009 saw this series running about -.4. Since 2010 this series has been running about -1 indicating very low financial stress. Like the Volatility Index or VIX that kicks off the year below 10 the message is “what me worry” as the markets couldn’t be calmer from a historical perspective. Also from a historical perspective markets tend to mean revert, meaning they don’t tend to stay at one extreme or another for very long, the longer they are there the greater the odds of mean reversion.