Let me start by saying that I am not prognosticating about a market rout. I say this a lot, because the things I look at can lean in that direction. What I look at is risk, and market vulnerability to shocks and scenarios is part of the equation for that. Because to have a market shock you need two things: A catalyst sort of event, and a market vulnerability to that event.
We have a number of possible events laid out to view. These are no secret; things that can really affect the economy are not subtle. Things like stagflation and geopolitical shocks. (Well, some are not subtle but tend to be pushed to the side. Case in point, climate, despite the fact that even right now climate is affecting the supply chain and energy production. Here is a link to my post on climate events that are material to the markets right now.
What makes the market vulnerable, so that a shock leads to a major market hit? Most of them are what are called technicals, things related to the market rather than the economy. Leverage, illiquidity, and concentration are key ones. I’ve written about each of these in the last while, and none of them look good.
Another type of indicator of vulnerability bridges between technicals and economic fundamentals: Consumer and business sentiment. One of the best of these is the OECD’s Consumer Opinion Survey. It includes indicators on consumer confidence, expected economic situation and price expectations. And it’s been around since 1950, so plenty of historical perspective.
It is at the lowest level in the past 60 years. To say things aren’t looking good on that front is an understatement.
Another interesting thing about the survey is that it does a great job of targeting recessions, which are shown as the gray bars. It dips with each of the recessions since 1960, usually before they start. Consumer confidence and sentiment surveys are all trying to do the same thing, so not surprisingly this OECD one is not the only one that has this feature.
