#Why is investor risk appetite increasing?
Investor enthusiasm for risk is reaching new heights not seen in over four years. Goldman Sachs has highlighted that its Risk Appetite Indicator, or RAI, jumped past 1.1 in mid-May. This level represents the highest mark since 2021 and places the indicator within the top 1% of all recorded observations since 1991.
To place this in context, when the RAI exceeds 1.0, it has occurred only about 2% of the time since 1950. Goldman has documented only six occurrences since 1991 where the RAI surpassed this crucial threshold.
#What is the significance of the 'double high' event?
The recent increase is particularly noteworthy due to the simultaneous signals that are emerging. Goldman strategists describe the current setting as a "double high," which refers to a condition where the RAI exceeds 1.0 and the equity momentum z-score climbs beyond 3.0 at the same time. Such a situation has not been observed since the early 2000s.
The RAI combines various metrics to gauge investor sentiment across several asset classes, including equities, fixed income, liquidity, commodities, and credit. Earlier this year, the RAI was already at 1.09, indicating a strong appetite for risk, which has now surged further, signaling robust risk-taking behavior in global markets.
#How have historical trends affected high RAI readings?
Goldman’s analysis indicates that the market environment continues to favor equities, even with high RAI readings. Historically, elevated RAI levels have been associated with positive short-term equity performance, as recent macroeconomic conditions remain supportive. However, heightened sentiment can lead to increased volatility, as extreme positions could rapidly adjust in response to unforeseen shocks.
#What should investors consider in this environment?
For those investing in equities, this analysis suggests that the existing macro conditions provide a justified rationale for maintaining stock exposure. The widespread expansion of risk appetite, which spans multiple sectors including equities, credit, commodities, and fixed income, indicates a more balanced approach rather than a narrow focus.
While digital assets are not explicitly included in Goldman’s risk appetite framework, past instances of similar RAI levels in 2021 coincided with a historic bull market for cryptocurrencies. During that time, major assets like Bitcoin and Ethereum achieved record highs amid a surge of institutional engagement.