Equity Downside Risk Dashboard

Atlas Capital Advisors

The Atlas Capital Equity Downside Risk Dashboard provides an indication of the risk of a large general decline in stock prices. The dashboard shows for five indicators the historical percentile of the indicator relative to the period since 1967, as well as the average for the five. A high historical percentile indicates favorable conditions for equity investors, while low percentiles indicate unfavorable conditions. Each indicator on its own has some bearing on the outlook for the stock market, but the combination has more predictive power than any independently. Equity downside risk is elevated when the combined dashboard is below the 35th percentile. Historically, when that was the case, investors would have experienced a higher investment return in cash than in stocks.

Economic Trend

Atlas Capital maintains a database of the important economic information for the world’s largest economies. The indicator is the GDP-weighted trend of this data over the prior year. A positive trend in the global economic data (high percentile in our chart) tends to lead to future gains for equity investors. The large and sustained equity bear markets of the past were typically accompanied by a deterioration in global economic data.

Inflation Trend

This indicator is a composite of the prior year trend in inflation metrics of the fourteen countries for which we track economic data. Sustained increases in inflation (a low percentile on our chart) have typically led to losses for equity investors.

Credit Spread Trend

Credit spreads are the difference between the interest rate paid by non-government borrows and the interest rate paid by the government. Increases in credit spreads (a low percentile on our chart) indicate that investors are becoming more concerned about risk of default by borrowers.

Value

This is a composite of the “price-to-something” metrics for global equities, including the ratio of price to trailing earnings, projected earnings, sales, cash flow and other metrics. Bad Value (a low percentile on this dashboard) is not a reliable signal to exit the stock market, on its own. But the great bear markets of history usually began when Value was stretched and then economic growth faltered.

Price Trend

This is a measure of how much equity prices have changed over the prior year. A higher increase in stock prices leads to a higher percentile on our chart. Rising prices are an indication of positive sentiment among investors.

Dashboard Average

The average percentile of the five dashboard items is a more reliable downside risk metric than any single dashboard item. A reading below 35% indicates heightened downside risk.

May 2022 Assessment

As of the end of May 2022, the equity downside risk assessment continues to flash a warning signal for global equity investors. All of the items in the downside risk dashboard are negative, other than Value. Value has improved somewhat because the 13% decline in global equity prices in the year through May improved the relationship of price to fundamentals. Despite an uptick in Value, the dashboard average remains close to the lowest ever observed in the past 50 years – only 1% of the time was the average lower than it is now. On each occasion in the past when the dashboard became as negative as it is currently (1974, 2000, 2008), an equity bear market followed. As noted in Markets and the Economy, stock market prices tend to follow the economic data. The worst periods in stock market history have been when an expensive stock market, such as we had when the year began, encounters declining growth in the global economy. When that happens, exuberant market valuations become out of synch with declining economic growth, and equity prices ultimately follow the economic trend downward. The global economic information tracked by Atlas Capital continues to worsen, with rising interest rates and the war in Ukraine contributing to the decline in the economic outlook.

Positive

Neutral

Negative