Monthly Market Risk Update: September 2023 [SlideShare]

The Independent Market Observer
Monthly Market Risk Update
September 2023
Recession Risk
• Recessions are strongly associated with market drawdowns;
8 of 10 bear markets have occurred during recessions.
• According to the National Bureau of Economic Research, the
last recession began in February 2020, at the start of the
pandemic, and ended soon thereafter.
• The economic expansion continued in August, with strong
hiring serving as a highlight. The primary risks are a deeper
slowdown in growth and tighter monetary policy from
the Fed.
Source: Institute for Supply Management, Haver Analytics
Risk
Level
Economic Shock Risk
• A major systemic risk factor is the price of money, otherwise known
as interest rates.
• Interest rates drive the economy and financial markets; historically,
they’ve also played a key role in market downturns.
• So, let’s take a closer look at the yield curve.
Source: Institute for Supply Management, Haver Analytics
Spread Between 10-Year U.S. Treasury and 3-Month U.S. Treasury
Yield Curve
(10-Year Minus
3-Month
Treasury Rates)
Source: Haver Analytics
Risk
Level
Yield Curve (10-Year Minus 3-Month Treasury Rates)
continued
• The yield curve inversion narrowed modestly in August. The
3-month yield rose from 5.55% at the end of July to 5.56% at
the end of August. The 10-year yield increased from 3.97%
to 4.09%.
• This now marks 11 consecutive months with an inverted
3-month 10-year yield curve. This doesn’t guarantee that the
economy will enter a recession, but this widely monitored
signal could indicate further slowdowns.
Risk
Level
Market Risk
• Beyond the economy, we can also learn quite a bit by examining the
market itself. For our purposes, two things are important:
1. To recognize which factors signal high risk
2. To try to determine when those factors signal that the risk
has become an immediate concern
• Here, we’ll review valuations, margin debt, technical factors, and
market complacency.
Source: Standard & Poor’s, Robert Shiller, Haver Analytics
Note: Due to data limitations, this is the same valuation data as last month’s update.
Stock Price Index: Standard & Poor’s 500 Composite
EOP, 1941-43=10
Valuations:
10-Month
Change in
Shiller P/E
Shiller Cyclically Adjusted S&P Price-to-Earnings Ratio
10-Month % Change
Risk
Level
Valuations: 10-Month Change in Shiller P/E
continued
• Looking at the 10-month change in the Shiller cyclically adjusted
price-to-earnings ratio is a good gauge of immediate risk.
• When the change drops below zero over a 10-month or
200-day period, the market typically drops shortly thereafter.
• On a 10-month basis, valuations rose 9.17% in July, breaking a
17-month streak of declining valuations.
Risk
Level
Source: Standard & Poor’s, Haver Analytics
Stock Price Index: Standard & Poor’s 500 Composite
EOP, 1941-43=10
Margin Debt
as % of
NYSE Market
Capitalization
FINRA Margin Debt as % of NYSE Market Capitalization
% Change Year-to-Year
Risk
Level
Margin Debt as % of NYSE Market Capitalization
continued
• Spikes in debt levels typically precede a market drawdown.
• Margin debt as a percentage of market capitalization
increased 0.67% on a year-over-year basis in July, which
marks the first year-over-year increase since November 2021.
Risk
Level
Source: Standard & Poor’s, Haver Analytics
Stock Price Index: Standard & Poor’s 500 Composite
EOP, 1941-43=10
Technical
Factors:
200-Day and
400-Day
Moving
Averages
S&P 10-Month (200-Day) Moving Average
S&P 20-Month (400-Day) Moving Average
Risk
Level
Technical Factors: 200-Day and 400-Day
Moving Averages continued
• We start to pay attention when a market breaks through its
200-day average; a breakthrough of the 400-day average
often signals further trouble ahead.
• The S&P 500, Dow Jones Industrial Average (DJIA), and
Nasdaq Composite all finished above their respective 200-day
moving averages in August.
• This is the eighth consecutive month that all three indices
experienced technical support. Risk
Level
S&P 500 Forward P/E Divided by VIX
Market
Complacency:
S&P 500
Forward P/E
Divided by
VIX
Source: Haver Analytics, FactSet
Risk
Level
Market Complacency: S&P 500 Forward P/E
Divided by VIX continued
• Often, high valuations (forward P/E) signal investors are confident
and potentially complacent. When volatility (VIX) is high, there is
less complacency.
• Periods of high valuations and low volatility cause peaks in the
index (e.g., 2000, 2006–2007, and 2017); market drawdowns
occurred roughly one year after those peaks.
• Market complacency fell in August. The VIX increased from 13.94
in July to 15.85 in August, while the forward-looking P/E ratio
dropped from 19.2 to 18.6.
Source: Institute for Supply Management, Haver Analytics
Risk
Level
Conclusion: Market Risks Remain
• Signs of a potential slowdown in economic growth in August
spooked investors and contributed to the declines.
• The modest sell-off in August was a reminder that real risks
remain for investors despite the positive returns we’ve seen
this year.
• Ultimately, the path back to normal will likely be long, with
setbacks along the way.
Source: Institute for Supply Management, Haver Analytics
Risk
Level
Certain sections of this commentary contain forward-
looking statements that are based on our reasonable
expectations, estimates, projections, and assumptions.
Forward-looking statements are not guarantees of future
performance and involve certain risks and uncertainties,
which are difficult to predict. Past performance is not
indicative of future results.
Diversification does not assure a profit or protect against
loss in declining markets. All indices are unmanaged, and
investors cannot invest directly in an index.
The information contained herein is provided for
informational purposes only and is based upon sources
believed to be reliable. No guarantee is made as to the
completeness or accuracy of the information.
Disclosure
1 von 16

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Monthly Market Risk Update: September 2023 [SlideShare]

  • 1. The Independent Market Observer Monthly Market Risk Update September 2023
  • 2. Recession Risk • Recessions are strongly associated with market drawdowns; 8 of 10 bear markets have occurred during recessions. • According to the National Bureau of Economic Research, the last recession began in February 2020, at the start of the pandemic, and ended soon thereafter. • The economic expansion continued in August, with strong hiring serving as a highlight. The primary risks are a deeper slowdown in growth and tighter monetary policy from the Fed. Source: Institute for Supply Management, Haver Analytics Risk Level
  • 3. Economic Shock Risk • A major systemic risk factor is the price of money, otherwise known as interest rates. • Interest rates drive the economy and financial markets; historically, they’ve also played a key role in market downturns. • So, let’s take a closer look at the yield curve. Source: Institute for Supply Management, Haver Analytics
  • 4. Spread Between 10-Year U.S. Treasury and 3-Month U.S. Treasury Yield Curve (10-Year Minus 3-Month Treasury Rates) Source: Haver Analytics Risk Level
  • 5. Yield Curve (10-Year Minus 3-Month Treasury Rates) continued • The yield curve inversion narrowed modestly in August. The 3-month yield rose from 5.55% at the end of July to 5.56% at the end of August. The 10-year yield increased from 3.97% to 4.09%. • This now marks 11 consecutive months with an inverted 3-month 10-year yield curve. This doesn’t guarantee that the economy will enter a recession, but this widely monitored signal could indicate further slowdowns. Risk Level
  • 6. Market Risk • Beyond the economy, we can also learn quite a bit by examining the market itself. For our purposes, two things are important: 1. To recognize which factors signal high risk 2. To try to determine when those factors signal that the risk has become an immediate concern • Here, we’ll review valuations, margin debt, technical factors, and market complacency.
  • 7. Source: Standard & Poor’s, Robert Shiller, Haver Analytics Note: Due to data limitations, this is the same valuation data as last month’s update. Stock Price Index: Standard & Poor’s 500 Composite EOP, 1941-43=10 Valuations: 10-Month Change in Shiller P/E Shiller Cyclically Adjusted S&P Price-to-Earnings Ratio 10-Month % Change Risk Level
  • 8. Valuations: 10-Month Change in Shiller P/E continued • Looking at the 10-month change in the Shiller cyclically adjusted price-to-earnings ratio is a good gauge of immediate risk. • When the change drops below zero over a 10-month or 200-day period, the market typically drops shortly thereafter. • On a 10-month basis, valuations rose 9.17% in July, breaking a 17-month streak of declining valuations. Risk Level
  • 9. Source: Standard & Poor’s, Haver Analytics Stock Price Index: Standard & Poor’s 500 Composite EOP, 1941-43=10 Margin Debt as % of NYSE Market Capitalization FINRA Margin Debt as % of NYSE Market Capitalization % Change Year-to-Year Risk Level
  • 10. Margin Debt as % of NYSE Market Capitalization continued • Spikes in debt levels typically precede a market drawdown. • Margin debt as a percentage of market capitalization increased 0.67% on a year-over-year basis in July, which marks the first year-over-year increase since November 2021. Risk Level
  • 11. Source: Standard & Poor’s, Haver Analytics Stock Price Index: Standard & Poor’s 500 Composite EOP, 1941-43=10 Technical Factors: 200-Day and 400-Day Moving Averages S&P 10-Month (200-Day) Moving Average S&P 20-Month (400-Day) Moving Average Risk Level
  • 12. Technical Factors: 200-Day and 400-Day Moving Averages continued • We start to pay attention when a market breaks through its 200-day average; a breakthrough of the 400-day average often signals further trouble ahead. • The S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite all finished above their respective 200-day moving averages in August. • This is the eighth consecutive month that all three indices experienced technical support. Risk Level
  • 13. S&P 500 Forward P/E Divided by VIX Market Complacency: S&P 500 Forward P/E Divided by VIX Source: Haver Analytics, FactSet Risk Level
  • 14. Market Complacency: S&P 500 Forward P/E Divided by VIX continued • Often, high valuations (forward P/E) signal investors are confident and potentially complacent. When volatility (VIX) is high, there is less complacency. • Periods of high valuations and low volatility cause peaks in the index (e.g., 2000, 2006–2007, and 2017); market drawdowns occurred roughly one year after those peaks. • Market complacency fell in August. The VIX increased from 13.94 in July to 15.85 in August, while the forward-looking P/E ratio dropped from 19.2 to 18.6. Source: Institute for Supply Management, Haver Analytics Risk Level
  • 15. Conclusion: Market Risks Remain • Signs of a potential slowdown in economic growth in August spooked investors and contributed to the declines. • The modest sell-off in August was a reminder that real risks remain for investors despite the positive returns we’ve seen this year. • Ultimately, the path back to normal will likely be long, with setbacks along the way. Source: Institute for Supply Management, Haver Analytics Risk Level
  • 16. Certain sections of this commentary contain forward- looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged, and investors cannot invest directly in an index. The information contained herein is provided for informational purposes only and is based upon sources believed to be reliable. No guarantee is made as to the completeness or accuracy of the information. Disclosure