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 six indicators the historical percentile of the indicator relative to the period since 1967. 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 three or more of these metrics are below the 33rd percentile of historical data. 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.

Fundamental Growth Trend

This is the trend in corporate fundamentals, such as earnings, sales and cash flow. Faster growth in fundamentals tends to lead to better subsequent returns for equity investors.

January 2022 Assessment

As of the end of January 2022, the equity downside risk assessment is flashing a warning signal for global equity investors. Value and Inflation Trend have been quite negative in comparison to history for most of the past year. The trend in the global Economic data has become negative in recent months, and the growth in corporate fundamentals is also slipping. The more recent developments are that credit spreads have begun to widen and the price trend in global equities has become slightly negative. 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 have now, encounters a declining global economy. Increases in interest rates, which are expected, have often led to lower economic growth, which could cause exuberant market valuations to become out of synch with the declining economic growth.

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