Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Financial Conditions are Still too Easy for the Stocks Bull Market to End

Stock-Markets / Stock Markets 2018 May 21, 2018 - 05:16 AM GMT

By: Troy_Bombardia

Stock-Markets

Investors and traders love to fixate on the absolute level of interest rates.

  1. “It’s all over when the 10 year yield reaches 3%”.
  2. “It’s all over when the 10 year yield reaches 3.25%”.
  3. “It’s all over when the 10 year yield reaches 4%”.
  4. “It’s all over when the 10 year yield reaches 4.5%”.

Instead, investors and traders should focus on how interest rates are impacting various aspects of the economy right now. Focus on the RELATIVE relationship.


The reality is that nobody knows when interest rates will start to impact the economy and stock market. But we certainly know that interest rates currently have a minimal adverse impact on the economy and stock market.

The Chicago Fed’s National Financial Conditions Index looks at U.S. financial conditions on a weekly basis. This Index has 3 components.

  1. Risk Subindex. This looks at volatility and funding risk in the financial sector
  2. Credit Subindex. This looks at measures of credit conditions.
  3. Leverage Subindex. This looks at debt.

The National Financial Conditions Index (NFCI) and its components demonstrate that financial conditions are still too easy in the U.S. for a recession and bear market to start. Financial conditions need to tighten significantly before this equities bull market can end.

National Financial Conditions Index: conditions are too easy

The Financial Conditions Index is too low right now. Historical equities bear markets (1973, 2000, and 2007) started when the Index was at least 0. The Index is currently at -0.55.

In addition, historical recessions that led to “significant corrections” in the stock market also started when the Index was at least 0.

National Financial Conditions Risk Subindex: conditions are too easy

The Risk Subindex is too low right now. Historical equities bear markets (1973, 2000, and 2007) started when the Subindex was at least close to 0. The Subindex is currently at -0.76.

In addition, historical recessions that led to “significant corrections” in the stock market also started when the Subindex was at least close to 0.

National Financial Conditions Credit Subindex: conditions are too easy

The Credit Subindex is too low right now. Historical equities bear markets (1973, 2000, and 2007) started when the Subindex was at least close to 0. The Subindex is currently at -0.71.

In addition, historical recessions that led to “significant corrections” in the stock market also started when the Subindex was at least close to 0.

National Financial Conditions Leverage Subindex: conditions are too easy

The Leverage Subindex is too low right now. Historical equities bear markets (1973, 2000, and 2007) started when the Subindex was at least 0. The Subindex is currently at -0.49.

In addition, historical recessions that led to “significant corrections” in the stock market also started when the Subindex was at least 0.

Conclusion: Financial Conditions going forward

Financial conditions will definitely tighten and deteriorate as the Fed raises interest rates. But financial conditions are still too easy to start a recession or bear market in stocks. You can see this fact through other data series. Banks are loosening their lending standards despite rising interest rates.

There’s no point in guessing “when” financial conditions will tighten enough to hurt the stock market and economy. It’ll happen sometime over the next 1-2 years. All we can do right now is know that financial conditions will remain easy for the immediate future. Take things one step at a time. Don’t try to predict 10 steps into the future. Predict the market’s next 1-2 steps.

Read more stock market studies here 

By Troy Bombardia

BullMarkets.co

I’m Troy Bombardia, the author behind BullMarkets.co. I used to run a hedge fund, but closed it due to a major health scare. I am now enjoying life and simply investing/trading my own account. I focus on long term performance and ignore short term performance.

Copyright 2018 © Troy Bombardia - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in