Starting in 2010, the relationship and reasoning breaks down. In Chart 2, the ratio between the two has dislocated and is now near an all-time high. This ratio peaked immediately following the election in November 2016. The last time this measure was as high, it preceded a very strong equity market from 2012-2014.
Source: Bloomberg, Helios Quantitative ResearchAs we navigate expectations in an environment of heightened headline risk and subdued volatility, it is critical to focus on the data that moves markets. This is an important chart to share with clients, as it will help show why making investment decisions solely based on news headlines is a terrible idea. We feel strongly that the more reliable source is the active market participants with money at risk, not the sources whose job is to sell newspapers.
More importantly, the vast amount of news and information at our fingertips has created an environment where markets do not react the same way as they used to regarding policy related information that can signal rough economic times ahead. So, what happens when the wolf finally comes along to feast on our herd of sheep?
With all the “fake news” out there and escalating distrust in the accuracy of traditional media, we must consider the fact that once real danger comes along, Advisors will have to rely on sources other than the traditional relationship between news and risk. This is a period of time where we feel a deep, quantitative approach to investing has the chance to help Advisors deliver quality advice to their clients. By using real-time data focused on what is really happening within the economy and markets, we believe this is the most prudent and accurate way to help clients avoid the next recessionary environment without crying wolf.
This article was written by Joe Mallen and Chris Shuba of Helios Quantitative Research, a participant in the ETF Strategist Channel.
Helios Quantitative Research provides financial advisors with the ability to offer state-of-the art, algorithm-driven asset management solutions to their clients on any platform. This allows advisors to:
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