Understanding Market Stress: A Look at Liquidity and Wealth Trends

The interconnectedness among USA liquidity, China liquidity, and global wealth reflected in the MSCI World Index is illustrated in our chart below.

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Additionally, our team has constructed a stress index demonstrating financial market turbulence in the past and present.

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The 12-month liquidity percentage change in the USA has experienced significant fluctuations, especially hitting noticeable peaks around 2015 and early 2020, contrasting with the more stable liquidity changes in China.

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The MSCI World Wealth Index has shown high volatility, notably around 2015, 2018, and early 2020.

Moments of heightened financial pressure, vividly marked in red, are closely intertwined with substantial drops in both liquidity and global wealth, as evidenced during the early financial turbulence of 2020 brought on by the COVID-19 crisis.

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The relationship between liquidity shifts and global wealth is clearly observable; upticks in liquidity generally align with global wealth increases, while liquidity downturns often precede or align with wealth declines.

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The stress index is designed to maintain an average value of zero, symbolizing the normalcy of financial market conditions.

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Market stress can be characterized as volatility, uncertainty and risk.

A zero reading implies standard market stress levels, while negative values indicate lower stress, signaling market stability.

On the contrary, positive values above zero signify increased stress levels, reflecting heightened market turbulence and potential financial instability.

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By carefully observing the stress index, investors can predict market shifts while enhancing returns through effective risk management amidst market volatility.