Climbing the ‘Wall of Worry’ is a not so favorite pass-time of most investors. Currently there is plenty to worry about. Deutsche Bank could spark an international financial crisis. Middle East wars in Syria and Yemen could cause disruption in energy supplies. Central Banks, including the Fed, can change course on monetary easing policies, pushing up interest rates sparking investors to sell over-leveraged assets. Ultimately such factors could combine to push the U.S. into recession, which post the 2016 Presidential election would not be an unusual occurrence. Is it a random market event that so many U.S. market downturns coincide with major elections? And I don’t just refer to the years 2000 and 2008. Look at 1972, 1980 or even 1946, to name a few. The passing of the baton to a new party or President almost never happens without some market turmoil.
Financial Relativity Index shows subdued immediate Market Risk
A technical model that I use to gauge the risk of a major market down-turn currently is not showing signs of an imminent market breakdown. Although there are several risks highlighted by the model, overall the market currently reflects only subdued risk.
The model as of September 30, 2016 had a reading of 4 on a scale of 20. The low reading based on the factors assessed historically dating back to 1956 (month end data-points) put the market in low risk until, of course, something happens. In this model, the usual signal is a year over year collapse in returns to investors. The big moves downward have typically occurred after a quick spike in the market to a new all-time high, followed within 2-3 months by a down move that puts year-over-year returns in negative territory. This signature market phenomenon is explained in detail in my book, Theory of Financial Relativity.