The world economy is in a precarious state of uncertainty and the recent breadth indicators illustrate this dire condition. In times of economic instability, it is important to understand how different investments and markets are responding to global events to ensure one’s financial security. Breadth indicators are those which measure the overall direction of an index, market, or economy rather than just one or two large stocks.
The Global Financial Stress Index (GFSI) is one of the more commonly used breadth indicators. This index measures the amount of stress present in global financial markets by looking at a wide range of factors including currency volatility, bond yields, and credit spreads. Recently, the GFSI has risen to levels last seen during the financial crisis of 2007-2008. This uptick in the GFSI indicates that markets are concerned about the future of the global economy.
Another popular breadth indicator is the Baker-ORB Fear and Greed Index. This index tracks the sentiment of traders by analyzing a variety of sentiment indexes, market cycles, put/call options volume, and the YoY change in the S&P 500. Currently, the Baker-ORB Index shows strong signs of fear, with readings dropping to the bottom of the index. This fear is illustrated in the current geopolitical environment, increasing market volatility, and recent reduction in consumer confidence.
It is clear from these breadth indicators that investors should be wary of the future. While there is still a possibility of recovery, the uncertain global conditions could present potential risks to portfolios. Therefore, it is important that traders understand the risks and take steps to protect their investments. By properly diversifying their holdings and monitoring market sentiment, investors can protect themselves and their portfolios in the face of potential economic turbulence.