A Thermometer That Measures Stress

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.

The information does not constitute investment, legal nor tax advice, nor an offer to invest or to provide management services and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential prospectus or offering memorandum or management agreement. It it not our intention to state, indicate or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing. Prior to making any investment, a prospective investor should consult with its own investment, accounting, legal and tax advisers to evaluate independently the risks, consequences and suitability of that investment. Acceptable Use Policy.

PLEASE NOTE: External links are provided as a convenience and a link does not imply Price Capital’s sponsorship or approval of any of these sites. When you access external web sites you are leaving Price Capital’s website.

Comment (1)


Comments are closed.