As the market continues to exhibit signs of instability, an interesting paper identified a correlation between the U.S. stock market and an index of the U.S. Financial Conditions. This index measures the assessment of the probability of a crisis.
The conclusion is that an imminent crisis mentality pervades equities markets today and implies that pricing is largely disconnected from fundamentals. On this blog we’ve discussed the topic of fundamentals and marveled at how pricing seems to be largely exclusive of it.
The case is made by the following chart: