Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19
Crude Oil Price Fails At Critical Fibonacci Level - 15th May 19
Strong Stock Market Rally Expected - 15th May 19
US China Trade Impasse Threatens US Lithium, Rare Earth Imports - 15th May 19
Gold Mind Reader's Guide to the Global Markets Galaxy: 'Surreal' - 15th May 19
Trade Wars and Other Black Swan Threats to Your Investments - 15th May 19
Our Long-Anticipated Gold Momentum Rally Begins - 15th May 19
Defense Spending Is Recession Proof - Defense Dividend Stocks - 15th May 19
US China Trade Issues Will Drive Market Trends – PART II - 14th May 19
The Exter Inverted Pyramid of Global Liquidity Credit risk, Liquidity and Gold - 14th May 19
Can You Afford To Ignore These Two Flawless Gold Slide Indicators? - 14th May 19
As cryptocurrency wallets become more popular, will cryptocurrencies replace traditional payments? - 14th May 19
How US Debt Will Reach $40 Trillion by 2025 - 14th May 19
Dangers Beyond a Trade War with China - 14th May 19
eBook - Greatest Tool for Trading? - 14th May 19
Classic Pitfalls for Inexperienced Traders - 14th May 19
Stock Market S&P 500 Negative Expectations Again - 13th May 19
Why Rising Living Standard in China Offers Global Hope - 13th May 19
Stock Market Anticipated Correction Starts On Cue! - 13th May 19
How Chinese Trade Issues Will Drive Stock Market Trends - 13th May 19
Amazon SCAM Deliveries for Fake Verified Purchaser Reviews "Brushing" - 13th May 19
Stock Market US China Trade War Panic - Video - 13th May 19
US Stock Market Leading Macro Economic Indicators Update - 12th May 19
SAMSUNG - BC94.L - Investing in AI Machine Intelligence Stocks - 11th May 19
US Increases Trade Tariffs Against China – Stock Markets, Gold, and Silver - 11th May 19
Who Has More To Lose In A No Deal Brexit? - 11th May 19
Gold at $1,344 Will Start Real Fireworks on the Upside - 11th May 19
Make America’s Economy Great Again - 10th May 19
Big US Stocks’ 2019 Fundamentals - 10th May 19
Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - 10th May 19
Stock Market Shake-Out Continues – Where Is The Bottom? - 10th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

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.


© 2005-2019 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

6 Critical Money Making Rules