Financial stress → World stocks

Common explanation (Ripple · opposite direction): In a panic, the prices of risky assets of all kinds tend to fall together.

This issue: Financial stress at 12 (cold), World stocks at 72 (warm) — Financial stress below normal, World stocks above normal, in line with the common explanation (this is an inverse link).

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

Financial stress: Now 0.009. World stocks: Positions of 20 national stock markets, weighted by market value 72.

Tests

Does this link hold up?

Common explanationIn a panic, the prices of risky assets of all kinds tend to fall togetherSource: European Central Bank, “Financial Stability Review, May 2020” (2020).
Tested against our dataAgreement between the positions of Financial stress and World stocks (same month), measured in the direction of the common explanation: +0.48 (an opposite-direction link: the raw correlation is −0.48, and a negative correlation fits, so the sign is flipped). Looking at every 5-year period (shifted one year at a time), the two moved in that direction in 28 of 32. Supported by the data
Periods when it did not holdAcross 32 5-year periods, out of step in 1991⁠–⁠1999.

History

The two lines, overlaid

Data: European Central Bank (ECB), Composite Indicator of Systemic Stress (CISS), new version; Positions of OECD national share price indices, weighted by World Bank market capitalization (calculated by this site). Positions: our calculation.

Financial stressWorld stocks

Time lag

At what lag do they match best?

Longer bar = moves more in the direction of the common explanation (the number is the agreement).

same month+0.48
3-month lag+0.47
6-month lag+0.47
9-month lag+0.48
12-month lag+0.47
18-month lag+0.44

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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