A Thermometer That Measures Stress

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The 2008 crash reminded investors that – like us during the holiday season – the financial system can also crash under stress.

But how can something as intangible as stress in the financial system be measured?

The St. Louis Federal Reserve answered this question by creating an index called the “Financial Stress Index” that tracks the “flight to quality” that happens when investors sense trouble brewing in our global financial system.

Similar to how children jump under a blanket when they’re scared, investors move their money to specific types of investments when higher yield-producing investments (especially stocks) struggle.

The Kansas City Federal Reserve also created a Financial Stress Index.  However, the St. Louis version covers a broader range of global indicators and gives arguably a better picture of broad financial system stress.

Comparing  St. Louis’ Financial Stress Index (in blue) to the S&P 500 shows how movement in the financial stress index slightly precedes movement in the S&P 500:

The next time you’re curious about the stress in the market, check out the financial stress index.  And if you’re exceptionally concerned—just like life—talk to a professional.