As credit and equity markets continue to grind higher with monotonous regularity, as bloviators fret about politics and analysts await clarity on monetary and fiscal policy, Bloomberg's Cameron 'macroman' Crise is worried that “this might be as good as it gets for US investors.”
As Crise explains, one of his favorite metrics is one-year trailing return to volatility ratios in major markets, which mean-revert and thus can provide early warning signals for when things get extended.
Typically, high-yield credit markets top out at a ratio between 4 and 6, while anything above 2 for stocks suggests that the S&P 500 is looking toppy.
Those readings are currently 4.1 and 2.3, respectively.
As is clear from the chart above, each time (2004, 2007, 2010, 2011, and 2015) saw a notable reversion in the US equity market.
As Crise notes, it’s pretty rare to see markets perform this way.
There have been 76 days this century where the IBOXHY ratio is above 4 and the SPXT ratio is above 2 — that’s just 1.8% of all trading days.
Does this mean that today is the peak and that it’s all downside from here? Of course not. (IG credit, for example, does not look at all extended by this measure.)
I would suggest, however, that if monetary conditions tighten notably or Trump over-promises and under-delivers, the halcyon days could come to an end very swiftly.