A reassessment of risk has permeated markets over the past several weeks following a period where asset values in general and tech equities in particular were priced to perfection.
One can observe the increased risk in the RSM US Financial Conditions Index that had recently drifted as low as 0.35 standard deviations above neutral.
All three sub-components of the index—the equity market, the bond market and the money market—are indicating some combination of increased volatility and lackluster results, with investors requiring higher compensation to cover the risk of holding a security.
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Perhaps what is equally important is the growing probability of a Federal Reserve rate cut on Dec. 10, which may be keeping financial conditions in terrain that supports growth.
Changes in monetary policy are transmitted to the economy through financial conditions. While we would expect a 25 basis-point rate cut by the Fed to have little immediate impact on the propensity to borrow or to lend, the obvious change in the direction of monetary policy would have a definitive impact on the direction of the business cycle.
