Markets in a Minute
Dove vs. Hawk: The Financial Conditions Index
This infographic is available as a poster.
This infographic is available as a poster.
Visualizing the Financial Conditions Index
What do financial conditions indicate about the economy? What effects do they have on growth?
From S&P 500 Index returns to the Cboe Volatility Index (VIX) to a range of credit conditions, the Chicago Fed’s Financial Conditions Index looks at whether financial activity is tighter than the historical average—or more accommodative.
This Markets in a Minute chart from New York Life Investments compares financial conditions in 2022 to the last 40 years as interest rates rise at the fastest rate in decades.
How Is the Financial Conditions Index Measured?
First, the Chicago Fed’s Financial Conditions Index takes 105 weighted average indicators of financial activity and organizes them into three main categories.
Together, the sum of these indicators provide an update on the state of U.S. financial markets.
| Category | Risk | Credit | Leverage |
|---|---|---|---|
| What Does It Measure? | - Volatility - Funding Risk | - Credit Conditions | - Debt and Equity Markets |
| Example Indicator | Cboe Volatility Index | Mortgage spreads, corporate bond yield spreads | S&P 500 Price Index Returns |
For example, low equity market volatility is associated with lower risk and better financial conditions.
Credit market factors, such as mortgage spreads and corporate bond yield spreads, indicate the credit conditions of the economy. Credit spreads are the difference in bond yields (returns) of two different debt securities with the same maturity, but with different credit quality.
In this way, a narrower credit spread often indicates better financial conditions, while a wider credit spread indicates worse conditions. Credit spreads apply to any debt instrument like mortgages or corporate bonds.
Asset prices, as seen in the S&P 500 Index, are part of the leverage category which measures the state of U.S. debt and equity markets. When the index is declining, it can be associated with tighter conditions.
Dove vs. Hawk
Another way to look at the state of financial conditions is through a ‘dovish’ or ‘hawkish’ lens.
When conditions are more accommodative, they can be seen as more dovish. This is when monetary policy favors lower interest rates to boost economic growth and employment.
Hawkish conditions, on the other hand, are characterized by tighter monetary policy. This is seen in higher interest rates to control inflation, but typically at the expense of economic growth, spending, and employment.
The Best of Times & the Worst of Times
When have the best and worst financial conditions taken place in recent history?
Following the recession of 1990, interest rates fell after periods of unprecedented highs in the 1980s. This eased the debt burdens for corporations and households, creating some of the most favorable financial conditions in the last several decades.
Despite the early 1990s being characterized with the most accommodative conditions, the period was marked by slow economic and employment growth.
Interestingly, it was not until the second half of the decade that growth accelerated, amid low inflation and unemployment. Broadly speaking, an increase in private-sector spending and employment helped drive this growth.
| Good Financial Conditions | Bad Financial Conditions |
|---|---|
| Q3 1993 | Q2 1980 |
| Q4 1990 | Q1 1980 |
| Q1 1994 | Q3 1981 |
| Q2 1993 | Q3 1982 |
| Q1 1993 | Q2 1981 |
| Q3 1992 | Q4 1980 |
| Q2 1992 | Q1 1981 |
| Q3 1992 | Q4 1982 |
| Q4 1992 | Q2 1982 |
| Q1 1996 | Q4 1981 |
| Q4 1996 | Q4 2008 |
| Q3 1994 | Q1 2009 |
By contrast, the early 1980s saw the worst financial conditions by far. Interest rates hit historic highs to rein in inflation, and financial conditions were strained.
Historically, tighter financial conditions have been linked to falling asset values and increasing risk premiums. This is the additional return an investor can expect to receive for holding a riskier asset compared to the return from a risk-free asset like a government bond.
During these conditions, economic activity can slow and the net worth of households and nonfinancial companies could decline amid tightened credit conditions.
A Closer Look: 2022 In Context
Against the backdrop of six interest rate hikes and declining equity market performance in 2022, financial markets are facing challenging conditions.
Given these factors, are conditions more hawkish or accommodative?
Compared to historical averages, financial markets still fall on the dovish side. Although conditions have slowly become less accommodative from their recent peak in mid-2021, they remain closer to neutral from a long-term perspective.
Still, corporate bond spreads, key indicators in the Financial Conditions Index, could widen if interest rates and default concerns continue to rise. Higher yields, in tandem with strain on other financial indicators like the VIX and S&P 500 returns, could tilt conditions to become more hawkish looking ahead.
Markets in a Minute
The Average American’s Financial Portfolio by Account Type
From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.
The Average American’s Financial Portfolio by Account Type
Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.
In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.
Breaking Down a Typical Financial Portfolio
People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.
| Account Type | % of Financial Portfolio |
|---|---|
| Employer retirement plan | 38% |
| Bank account | 23% |
| Brokerage/investment account | 14% |
| Traditional IRA | 10% |
| Roth IRA | 7% |
| Crypto wallet/account | 4% |
| Education savings account | 3% |
| Other | 1% |
Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.
Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.
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Account Insight for Advisors
Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).
Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.
The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.
Markets in a Minute
5 Factors Linked to Higher Investor Engagement
Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?
5 Factors Linked to Higher Investor Engagement
Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?
In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.
Influences on Investor Engagement
Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.
| Factor | Investor Engagement Index Score (Max = 100) |
|---|---|
| Financial advisor relationship | Don’t work with financial advisor: 63 |
| Work with financial advisor: 70 | |
| Sustainability alignment | No actions/alignment: 63 |
| Some/full alignment: 74 | |
| Trust in AI | Low trust: 61 |
| High trust: 74 | |
| Risk tolerance | Conservative: 62 |
| Aggressive: 76 | |
| Comfort making investment decisions | Low comfort: 42 |
| High comfort: 76 |
Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.
On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.
The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).
Personalizing Experiences Based on Engagement
Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.
On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).
The Average American’s Financial Portfolio by Account Type
5 Factors Linked to Higher Investor Engagement
The Top 5 Reasons Clients Fire a Financial Advisor
The Top 5 Reasons Clients Hire a Financial Advisor
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