Market Risk Indicator™

What Is the Market Risk Indicator™?

The Market Risk Indicator™ (MRI™) is a comprehensive rating system that assesses the overall risk level of the stock market by analyzing the largest 500 stocks. This indicator helps investors gauge the current market risk environment and potential volatility, enabling them to make more informed investment decisions. By utilizing the MRI™, investors can better anticipate periods of heightened risk or potential market downturns, allowing them to adjust their portfolios to mitigate potential losses. The MRI’s™ value lies in its ability to provide a clear, data-driven assessment of market conditions, helping investors protect and grow their wealth by managing market exposure based on reliable insights.

ERS’s Market Risk Indicator™, 12/31/1998 to 6/30/2024

S&P 500 Using the MRI™, 12/31/98 to 6/30/24

This chart presents a 25-year history of the MRI™ overlaid on the performance of the S&P 500. Observing the chart, readers will notice that periods marked by the highest market risk according to the MRI™ (highlighted in dark red) often coincide with instances where the S&P 500 reached new highs and subsequently experienced significant declines. This pattern underscores the predictive value of the MRI™ in signaling potential market downturns. By paying attention to the MRI™, investors can gain valuable insights into the overall market risk environment, allowing them to make more informed decisions and better avoid substantial losses during market declines. The ability to anticipate and react to high-risk periods is crucial for protecting and growing investments.

The chart compares the performance of two portfolios over a 25-year period: one that continuously holds the S&P 500 and another that adjusts its allocation between the S&P 500 and cash based on the Market Risk Indicator™. While the portfolio that continuously held the S&P 500 achieved a higher overall value, the MRI™-based portfolio experienced significantly less drawdown during market downturns. Notably, the MRI™-based portfolio was ahead of the continuous S&P 500 portfolio for approximately 77% of the study period. This highlights the value of using the MRI™ to manage risk, as it provided more stable returns and better protection against market losses, making it a valuable tool for investors seeking to mitigate risk while still participating in market gains.

These tables and charts collectively demonstrate a clear inverse relationship between the Market Risk Indicator™ and the performance of the S&P 500. The charts show that as the MRI™ rises, the average returns of the S&P 500 diminish significantly. The S&P 500’s average return and the probability of gains are highest when the MRI™ is low, and these metrics decline as the MRI™ increases.

This analysis highlights that higher MRI™ levels correlate with lower future returns and a decreased likelihood of gains, emphasizing the importance of the MRI™ in assessing market risk and making informed investment decisions to avoid potential downturns.

1-Year S&P 500 Performance Relative to MRI™ Levels

2-Year S&P 500 Performance Relative to MRI™ Levels