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Risk Appetite hasn't fully recovered

Troy Bombardia
2020-07-15
The majority of our sentiment indicators have recovered from the stock market's plunge in March. One of the few that hasn't is the Risk Appetite Index.

The majority of our sentiment indicators have recovered from the stock market's plunge in March. These indicators are either showing extreme optimism or almost-extreme readings. The Risk Appetite Index is one of the few indicators that isn't even close to registering an extreme despite the stock market's monster rally since late-March.

Taking a look under the hood, we can see that the Citigroup Macro Risk Index is still extremely elevated. 

In a way this is to be expected, and is how all post-bear market rallies begin. For example, the 2009 rally was all about "green shoots". Bears were scratching their heads in amazement as the stock market seemingly disconnected from reality: how could stocks rally despite the ongoing recession? What matter in 2009 wasn't how "good" or "bad" the economy was - what matter was that the weak economy was getting better than before.

The following table demonstrates that post-bear market rallies in the past 22 years were accompanied by tepid increases in the Risk Appetite Index.

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