Financial conditions have never been easier...or bubbly

Never been easier

According to Bloomberg data, this is among the easiest times ever for investors. Financial conditions are about as good as they get.

the Bloomberg U.S. Financial Conditions Index (FCI) has been rising along with stocks. While that’s something of a tautology since the FCI includes stocks in the calculation, it’s not a driving force. Per Bloomberg: 

“The Bloomberg U.S. Financial Conditions Index tracks the overall level of financial stress in the U.S. money, bond, and equity markets to help assess the availability and cost of credit. A positive value indicates accommodative financial conditions, while a negative value indicates tighter financial conditions relative to pre-crisis norms.”

With the S&P 500 recently moving to all-time highs, the FCI has approached 1.0. While it can go higher, this is for all practical purposes a maximum reading. There is a contrary nature to financial conditions, though, especially over the medium-term.

When those financial conditions include “bubble” assets, we’re at a record extreme dating back 30 years.

Financial conditions

When FCI+ exceeded 2.0, much less the 2.5 level it’s at now, future returns were not impressive over the short- to medium-term.

Growth vs. Value

And finally, Bloomberg noted that growth stocks have surged in comparison to value stocks. This isn't surprising given how much tech stocks have rallied.

S&P 500 growth vs value

When investors/traders preferred growth over value this much in the past, the U.S. stock market's returns over the next month were consistently weak.

Growth value ratio jumps

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The post titled Financial conditions have never been easier...or bubbly was originally published as on on 2020-02-18.

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