Risk Appetite Ratios

The following ratios have proven to give a good estimate of risk appetite among investors

Note : Shaded areas represent the 5% & 95% percentile on the charted data.

EQUITY MARKETS

EEM/SPY - Max
 
How much are investors believing in “Global growth” ?They have until the crisis, and during the early recovery.Recently, this ratio has significantly weakened.
Cons. Cyclical vs Defensive - 3Y The consumer has not fully recovered, even thought there has been a steady improvement since early 2009.Recently weakening, but a lot of potential
Cons. Cyclical vs Defensive - Max
 
A surprisingly accurate leading ratio : spots the 00s’ top and bottoms, warns of the weakening economy in mid 2007, and spot the 2009 bottom very nicely.
Growth vs Value - Max
 
Strength in value stocks traditionally shows risk appetite, as this type of company usually have weaker balance sheets.Recently this ratio has been quite uninformative.
Small Caps vs Large Caps - Max
 
Analysis is not so straightforward. In theory, small caps are riskier than large caps, so this ratio constantly decreasing from 93 to 99 is surprising.
Sotheby's vs SP-500 - 3Y Still showing strength, but slowing down. As explained below, the Sotheby’s ratio is not that useful for tops, as it’s too early.
Sotheby's vs SP-500 - Max Is there a more cyclical business than Sotheby’s ?As can be seen from this long-term chart, the Sotheby’s / SP-500 ratio has done an excellent job at spotting major bottoms, however it’s not that great for tops – too early (2000 top spotted in 1999, 2007 a bit early)

 
 

CREDIT MARKETS

Corporate Bonds vs Treasuries - Max  Excellent at picking the 2009 bottom.As of now, appears to show strength.
Junk Bonds vs Corporate Bonds - 3Y Showing strength
Junk Bonds vs Corporate Bonds - Max  Overall one of the best : early and accurate measure of impending trouble (mid 2007), good bottom picker for 2009. According to this, the economy is still healthy and improving
Equities vs Bonds - Max A classic one. Shows a normal, mid-cycle risk appetite.
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