Mastering Financial Stress

19 September 2016

Standard Life Investments, the global investment manager, has developed a timely and comprehensive indicator of financial market stress to help understand the links between financial, economic and monetary policy cycles. The Standard Life Investments Financial Stress Index (SLIFSI) measures the co-movement of 23 financial variables, across key segments of US financial markets including indicators of credit risk, equity fundamentals, asset price volatility and liquidity. Updated weekly, the index is helpful for understanding the different drivers and consequences of financial stress.

Incorporating data dating back to 1992, the SLIFSI has anticipated the most important economic turning points in the US over the past 25 years. The analysis shows that bouts of financial stress tend to be damaging for growth unless countered by rapid policy easing and that the interdependence of monetary policy and financial stress has intensified since the financial crisis.

Jeremy Lawson

Chief Economist, Jeremy Lawson explained “As events such as the Asian crisis, the tech bubble, the global financial crisis and the Eurozone crisis unfolded, they were all compounded by stresses in financial markets. Given the links between financial conditions, asset returns, economic performance and monetary policy, it is useful for investors to be able to monitor financial stress in real time and receive rapid signals of changes in direction.

“Until the cyclical and structural factors that have reinforced the feedback between monetary policy, financial stress and the economy diminishes, the normalisation of policy settings is likely to remain elusive. Investors should also note that the transition from low to high financial stress regimes can be very rapid, and it is usually the assets that are most dependent on the easy liquidity environment that are most vulnerable to a sudden change in market conditions”.