Our note yesterday highlighted that the current environment is likely to experience volatility. At this point of the economic cycle with the Fed raising rates, the question should not be whether there can be corrections, but what investors should do with them. In a levered system that is based on credit availability, it is hard to have a credit crisis without any significant and sustainable credit stress (Figure 1). Recessions and subsequent bear markets don’t just magically show up. So what are the factors we use to identify coming issues prior to a financial crisis?
- There must be an inversion of the yield curve
- Banks then begin to more aggressively tighten lending standards
- Small business confidence weakens.
- Manufacturing sentiment accelerates to the downside
Figure 1 – There are no signs of banking, shadow banking or market credit stress in NFCI Indices’ 105 indicators
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