Goldman Sachs has introduced a new Financial Stress Index (FSI) that, despite recent market volatility, indicates financial stress remains within normal historical levels. They announced recently that the index offers a nuanced view of current market conditions amid recent upheavals.
Over the past few days, markets have experienced heightened volatility, driven by a confluence of factors, including unexpected swings in equity and bond markets and ongoing uncertainties in global financial conditions. Goldman Sachs’ FSI, however, suggests that while stress levels have increased compared to a week ago, they are still considered normal when viewed through a historical lens.
According to Goldman Sachs economists, most of the recent tightening in the index is attributed to elevated volatility expectations in both equity and bond markets. Despite these fluctuations, conditions in short-term funding markets have remained impressively stable. This stability implies that, although market stress has risen, there have not been any major disruptions necessitating intervention by policymakers, providing a sense of security to investors.
Goldman Sachs also highlighted that their Financial Conditions Index (FCI), which reflects changes in equity markets, Treasury yields, and other asset classes, indicates a modest impact on gross domestic product (GDP) growth. Specifically, the FCI suggests a reduction of approximately 12 basis points in GDP growth over the coming year due to recent market movements.
Recent global equity market turbulence, sparked by the unwinding of short-yen carry trades, disappointing U.S. job data, and weaker-than-expected earnings from major technology firms, has pushed investors toward the safety of U.S. Treasuries. This shift has decreased Treasury yields and raised concerns about how well financial markets can handle increased risk.
The newly introduced FSI differs from existing indexes by focusing specifically on risks to market functioning. It incorporates measures such as expected volatility in bonds and stocks, interest rate differentials across short-term funding markets, Treasury swap spreads, and credit and equity funding cost spreads. Unlike similar stress indexes maintained by the Federal Reserve banks of St. Louis and Kansas City, Goldman Sachs’ FSI will be updated daily, providing a more immediate and comprehensive snapshot of financial stress, keeping investors and policymakers well-informed.
Overall, the new index underscores that while recent market movements have introduced some volatility, the underlying financial stress remains within historically typical levels, reassuring investors and policymakers alike.
