The market's binary mode-switch between appetite for riskier assets (equities, high-yield debt, commodities) and flight to safety (government bonds, gold, cash).
Deeper Explanation
During risk-on periods, investors actively seek yield and capital appreciation in riskier assets — equities rise, credit spreads tighten, emerging markets outperform, volatility falls. During risk-off periods, uncertainty drives capital to the safest assets — government bonds and gold rally, equities fall, credit spreads widen, emerging markets underperform, volatility spikes. These shifts can occur very quickly (as in March 2020) and can be triggered by unexpected events: political shocks, central bank surprises, or sharp economic data disappointments. The Risk-On/Risk-Off dynamic is particularly pronounced for assets that are liquid enough to be repositioned quickly, making it a shorter-term phenomenon overlaid on longer economic cycles.
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