Three indexes of the Federal Reserve…calculate and report statistical measures of financial stress in the U.S. economy on a regular basis…[and] all three have returned to their pre-recession levels last seen in May 2007. [What does that mean for stock market valuations? Let’s take a look.] Words: 460; Chart: 1
So writes Mark J. Perry in edited excerpts from his original article* as posted on seekingalpha.com entitled 1 Reason For Market Rally? Financial Stress Has Returned To Mid-2007 Levels By 3 Fed Measures.
This post is presented compliments of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the Intelligence Report newsletter (It’s free – sign up here), and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Perry goes on to say in further edited excerpts:
They appear together in the chart below from January 2004 to March 2013.
Here’s a summary of the March stress indexes:
1. The Kansas City Financial Stress Index (KCFSI)
- a monthly composite index of 11 variables reflecting stress in the U.S. financial system,
- fell in March to -0.63, which is the lowest index reading…since May 2007 (see blue line on chart),
- negative values…indicate that financial stress is below the long-run average, and
- the KCFSI has been below zero for 14 consecutive months starting in February of last year.
2. The St. Louis Fed Financial Stress Index (STLFSI)
- a statistical measure of financial market stress…based on 18 weekly data series (7 interest rates, 6 yield spreads, and 5 other financial variables),
- has been steadily trending downward…[since] October 2011 when the monthly average for the index was at 0.70 (red line on chart),
- the March STLFSI averaged -0.66, which is the lowest financial stress reading since July 2007.
3. The Chicago Fed National Financial Conditions Index (NFCI)
- a composite index based on 100 different financial indicators,
- a highly accurate leading indicator of financial stress at horizons of up to one year.
- increasing risk, tighter credit conditions, and declining leverage are consistent with tightening financial conditions and produce positive values for the NFCI, while negative values indicate the opposite conditions.
- has been negative since late 2009, and has been trending downward since mid-2011 (see brown line on chart)’
- the March NFCI average fell to -0.77, which indicates that the stress in U.S. financial markets is at the lowest level since May 2007 by this measure.
Stop Surfing the Net!
Enjoy this site? Like to have every article sent to you?
Go HERE and sign up to receive your Intelligence Report
It’s FREE but limited to only 1000 active subscribers
Spread the Word!
Tell others about one of the highest quality (content and presentation) financial sites on the internet
Unique visits/pageviews are doubling yearly & time-on-site continues to reach new highs
munKNEE should be in everybody’s inbox and MONEY in everybody’s wallet!
Based on these three different Federal Reserve bank measures of financial stress that have all shown a high degree of historical accuracy in assessing the amount of stress in U.S. financial markets, we can conclude several things:
- financial stress has been gradually falling since the fall of 2008, when all three indexes reached their cyclical highs,
- after reaching slightly elevated stress levels in the fall of 2011, all three indexes indicate that financial stress in the U.S. have been declining over the last 18 months, and
- all three indexes have returned to their pre-recession levels last seen in May 2007 for the Kansas City and Chicago Fed stress indexes and July 2007 for the St. Louis index.
The return of financial stress to mid-2007 by three different measures indicates that financial conditions have now normalized and stabilized at historical averages.
Current financial stress levels are consistent with the conditions of an economy in recovery and are one reason that stock market indexes have been trading close to record highs in recent weeks. Lower financial stress equals higher stock market valuations.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
Changes in economic indicators, copper and other commodity prices and stock market trends are covered in this month’s market intelligence infographic.
U.S. stocks are off to one of their best starts in years. Most indices are up 10% year to date, prompting many investors to ask: “Are we in another bubble?” The answer is no, at least when it comes to equities. Here are three reasons why:
The mainstream financial press would like us to believe that because the S&P 500 and Dow 30 are at or near their record highs that it must mean we’re nearing the end of the current bull market and, as such, now must be a terrible time to buy stocks. Let’s not jump to any conclusions, though. Instead, let’s do our own due diligence to find out. Hint: If you’ve been stuffing cash under the mattress since the last market crash, you might want to finally go deposit it in your brokerage account. Here’s why… Words: 420
While I remain cautious on stocks and the risk trade, the technical picture shows that the uptrend to be intact and the bulls should still be given the benefit of the doubt for now. At this point, any call for a correction is at best conjecture [as evidenced by the following 4 indicators]. Words: 399; Charts: 4
The Swimsuit Issue Indicator says that U.S. equity markets perform better in years when an American appears on the cover of Sports Illustrated’s annual issue as opposed to years when a non-American appears on the cover. [What is the nationality of this year’s cover model? Can we expect returns above the norm or will we see a year of underperformance for the S&P 500 this year? Read on.] Words: 323 ; Table: 1
As we all know, money printing always leads to inflation. It’s just a matter of figuring out which assets get inflated. This time around gold is not the only beneficiary, stocks are, too, and I’m convinced that the chart below holds the key to the end of the bull market. Words: 475; Charts: 1
Ever since the Dow broke the 14,000 mark and the S&P broke the 1,500 mark, even in the face of a shrinking GDP print, a lot of investors and commentators have been anxious. Some are proclaiming a rocket ride to the moon as bond money now rotates into stocks….[while] others are ringing the warning bell that this may be the beginning of the end, and a correction is likely coming. I find it a bit surprising, however, that no one is talking of the single largest driver for stocks in the past 4 years – massive monetary base expansion by the Fed. (This article does just that and concludes that the S&P 500 could well see a year end number of 1872 (+25%) and, realistically, another 28% increase in 2014 to 2387 which would represent a 60% increase from today’s level.) Words: 600; Charts: 3
For the month of January, U.S. stocks experienced the best month in more than two decades [and the Dow hit 14,009 on Feb. 1st for the first time since 2007]. Per the Stock Traders’ Almanac market indicator, the “January Barometer,” the performance of the S&P 500 Index in the first month of the year dictates where stock prices will head for the year. Let’s hope so…. [This article identifies f more solid reasons why equities should do well in 2013.] Words: 453
As Winston Churchill once said: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty” and in that vain I challenge all readers to fight off the negativity, see long-term opportunity in global equity markets and, most importantly, remain invested. Your future self may thank you. Words: 732; Charts: 6
[In spite of all that is seemingly wrong with the U.S. economy] I think we are on the verge of entering the euphoria stage of this cyclical bull market where traders become convinced that QE3 is a magic elexir with no unintended consequesnces. [As such,] I see a strong acceleration and a significant and sustained breakout above the S&P 500 September high of 1475. (Words: 264 + 3 charts)
Today, I’m dishing on the unbelievable rebound in residential real estate, pesky rumors about the dollar’s demise and a resurgent U.S. stock market. So let’s get to it.