Investors have gotten the most bang for their buck for each unit of risk they have decided to take. That easy ride is coming to end.
At least that’s the take of Jason Goepfert, who offers data-driven analysis through his SentimentEdge Report. He looked at the S&P 500’s Sharpe ratio, which tells us how much excess return you get for each additional bit of risk you take, and found that a historically good run for stocks may be coming to an end.
Looking at its six-month average and zooming out back 70 years, he identifies a peak in the ratio, which is when the 6-month average exceeds 1.2 and fails to reach a new high for at least the next 30 days. This average of Sharpe ratio recently exceeded that mark and was ranked in the top 7% of all days, or one of the best levels in history.