Risk-On Risk-Off

Risk-on and risk-off are terms used to describe the appetite for risk in financial markets. When risk-on sentiment is high, investors are willing to take on more risk in the hope of higher returns. This can lead to a surge in stock prices and other risky assets. Conversely, when risk-off sentiment is high, investors are more risk-averse and are more likely to sell risky assets and buy safe-haven assets such as government bonds.

Risk-on and risk-off sentiment can be driven by a variety of factors, including economic data, geopolitical events, and central bank policy. For example, a strong economic growth report or a dovish statement from the Federal Reserve could lead to risk-on sentiment, while a weak economic growth report or a hawkish statement from the Fed could lead to risk-off sentiment.

Risk-on and risk-off sentiment can have a significant impact on financial markets. When risk-on sentiment is high, stock prices tend to rise and volatility decreases. Conversely, when risk-off sentiment is high, stock prices tend to fall and volatility increases.

It is important to be aware of risk-on and risk-off sentiment when making investment decisions. When risk-on sentiment is high, it may be a good time to take on more risk in your portfolio. However, when risk-off sentiment is high, it may be a good time to reduce your risk exposure.

Here are some examples of how risk-on and risk-off sentiment can impact financial markets:

• In 2017, risk-on sentiment was high as investors anticipated that the Trump administration would implement pro-growth policies. This led to a surge in stock prices and other risky assets.
• In 2018, risk-off sentiment increased as investors became concerned about the impact of the trade war between the United States and China. This led to a sell-off in stock markets and a rise in volatility.
• In 2020, risk-off sentiment was high as investors reacted to the COVID-19 pandemic. This led to a sharp decline in stock prices and a surge in demand for safe-haven assets such as government bonds.

Risk-on and risk-off sentiment are important factors to consider when making investment decisions. By understanding the factors that drive risk-on and risk-off sentiment, investors can make more informed decisions about when to take on risk and when to reduce their risk exposure.