Many investment commentators talk about risk appetite, yet it is hard to measure directly. We can look at changes in flows and price changes in a set of assets to measure direction of preference for risky assets, but this is not the same as a desire for holding risk.
There was a period when investors would focus discussion on periods of risk-on and risk-off environments. The flipping between these two regimes called RORO trading. There would be a flight to quality where bonds would do well and stock poorly - risk-off. These periods would be followed by stocks doing well and bonds doing poorly - risk-on. This flipping of preferences created the negative correlation between stocks and bonds.
More recently, there have been other ways to describe risk appetite. When rates were extremely low, there was a discussion of TINA, (There Is No Alternative) to stocks and bonds. Some would call this the reach for yield. Given no cash alternative appetite was centered on risky assets.
However, times are changing, and we need a new or added narrative. In this case, we can start to think about TARA, (There Are Reasonable Alternatives). With cash now closing in on 5% and some measures suggesting that real rates are positive, investors don't have to reach for yield. They can be choosy and thus their risk appetite has fallen. Lower appetite for risk may take the form of being choosier about what to buy.
A fall in risk appetite fundamentally changes how markets will price risk and this repricing will go well beyond the fact that we are still in a bear market.
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