Beyond 3-sigma

The volatility we’re seeing in the equity markets is a 3rd standard deviation phenomenon. It is human to blame tariffs as the cause of the correction, but if you look at the chart below, the Buffett indicator, that basically divides the US stock Market Cap by the US GDP, also was above the 3rd standard deviation. And as the saying goes, “very few things happen beyond 3 sigma”, which means that if it wasn’t the tariffs, it would have been something else, but the market was due for a correction, because there was an excess. Where do we go from here? Do we need to cross the mean to clean the excess? That would be a severe correction, but if you look at the chart, that’s what happened in the past. And it may have already started, with the flows into Europe since the start of the year. It doesn’t need to be on a straight line, but it would appear there is some pain ahead. The “detox” period Scott Bessent refers to, may take us there.

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