Feb 20: Investment markets are “Risk Off” and what that means to investors.

Today we made a youtube livestream video and discuss that we see the US stock market as risk-off. We discuss how we come to this conclusion, and what it might mean to you as an investor.

Risk-off markets means that the expected returns to investing in risk is lower, and the expected return in investing in risk-free assets is higher than it was before, and the difference is too small for many to take that risk.

The expected return to risk in our quantitative models is just under 4%. Would you risk your wealth for a 4% per year expected return? Would you rather buy a US savings bond, put money in an FDIC insured savings account, or invest in short-term (4 week, 13 week or 52 week US Treasury bills)? Every time the risk free rate of return rises (it is now 4.70%) and the expected return of the stock market falls (now 8.57%), it lowers the expected return to taking risk (now 3.87%).

Given the new inflation readings this past week (CPI and PPI both up dramatically), many investors expect the US Federal Reserve Bank to raise policy interest rates again, and further tighten the money supply (which keeps rates high by making money harder to borrow).

The stock market is in a bear market, with the trend decidedly negative, although the past few weeks…