THE MODEL
Exhaustive research led us to conclude that particular data can be useful in helping to determine the current level of risk in the financial markets, particularly stocks. Over the last 25 years, we have developed and deployed our BCM Market Risk Model (The Model) as the foundation of our investment advisory business. As such, we have been able to identify opportunities offered by major stock market advances AND sidestep the brunt of major stock market declines.
HOW THE MODEL WORKS
The Model uses hard data from the following broad categories to help make an objective assessment of the current level of risk in the financial markets. These readings then become an objective guide in our efforts to make investment decisions for our clients.
Financial Data:
Such as the absolute and relative changes in the values of major market indices, as well as advance and decline statistics.
Economic Data:
Such as composite earnings and dividend growth rates for the U.S. stock market.
Monetary Data:
Such as measures of inflation and the health of credit markets, as well as U.S. Federal Reserve monetary policies.
With this body of data, the Model helps us formulate an opinion on the current risk climate for stocks.
It’s like this… a weather analogy.
When considering our Market Risk Model, we like to use the analogy of a weather forecast. Meteorologists follow a discipline that takes current data and models it in such a way to forecast the most likely outcome of the weather. Often the forecast is for clear skies, but there are also times when the conditions indicate a greater risk of stormy weather.
In similar fashion, this is how our Model works. It takes current data from the financial markets and makes a risk assessment. In practice, when the Model has registered a favorable risk outlook for stocks – “clear skies” – the financial markets have historically enjoyed broad gains. When the Model has registered an unfavorable risk outlook for stocks – “stormy weather” – it has likewise been effective, allowing us to successfully sidestep many of the major financial market declines.