As markets were experiencing sudden turmoil a month ago, I suggested five simple, readily available quantitative indicators that could help investors assess whether that bout of extreme volatility would be a transition to better-anchored financial markets in the medium-term.
These measures can be a partial proxy for evaluating the health of a much-delayed and critical transformation for financial markets: ensuring a shift toward better fundamentals that underpin what has been predominantly a liquidity-driven outcome for the trifecta of market valuations, volatility and correlations. This change would coincide with investors' move away from their faith that liquidity injections from non-commercial players (particularly central banks, which also provide comforting policy guidance) will continue to repress any and all bouts of volatility.
While it’s still early, here is where we stand on the metrics now that markets have rebounded and the Nasdaq is back at a record high:
Volatility: Instead of reverting to its unusually low levels after the dramatic spike, volatility (as measured by the VIX) has mostly traded in the suggested 15 to 20 points range needed for a healthy market reset.
U.S. Yields: The yield on 10-year bonds has traded between 2.81 percent and 2.95 percent, well within the suggested reset range.
Yield Differentials: U.S. bonds have remained within the suggested range versus 10-year German government bonds, which serve as an important benchmark for European rates.
Correlations: The correlations between risk assets and risk-free ones have tended to revert to their historical (negative) level, though not yet on a consistent basis.
Currencies: The DXY index has shown more two-way movements in the last few weeks, trading in a range of 88.7 to 90.6.