Macro-Markets Risk Index | 5.29.2013

A markets-based profile of US economic conditions suggests that business cycle risk remains low. The Macro-Markets Risk Index (MMRI) closed yesterday (May 28) at 15.6%–well above the danger zone of 0% and within the roughly 10%-to-17% range that’s prevailed so far in 2013. When MMRI falls under 0%, recession risk is elevated; readings above 0% equate with economic growth.

MMRI represents a subset of the indicators in the Economic Trend & Momentum indices, a pair benchmarks that track the economy’s broad trend for signs of major turning points in the business cycle. Analyzing the market-price components separately offers a real-time evaluation of macro conditions, according to the “wisdom of the crowd.” By contrast, conventional economic data series are published with a time lag. MMRI is intended as a supplement for developing perspective on the current month’s economic trend until all the economic numbers are published.
MMRI is a daily average of four indicators, calculated as follows:
• US stocks (S&P 500), 250-trading day % change
• Credit spread (BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread), inverted 260-trading day % change 1
• Treasury yield curve (10-yr Treasury yield less 3-month T-bill yield), daily, no transformation
• Oil prices (iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)), inverted 250-trading day % change
For additional information on MMRI, see this post, which introduced the index. Meanwhile, here’s how MMRI compares on a daily basis since August 2007:

Here’s how MMRI stacks up so far this year, through May 28:

1. The credit spread data uses a 260-day window rather than a 250-day window as a proxy for one-year changes because the High Yield Master II Index data set is published on weekends as well as weekdays. As a result, a slightly longer time window is required to approximate a one-year period that aligns with the one-year data for stocks and oil prices, which aren’t published on weekends. ^

3 thoughts on “Macro-Markets Risk Index | 5.29.2013

  1. Nitin Gulati

    I have created a macro market risk indicator similar to yours, only difference is I have included TED spread ( inverted into it). I am noticing same trend in index which implied lower risk in current economic environment. Lately I have been thinking about adding few more things to this index at-least commercial paper spread as it captures credit availability for businesses . Just wondering what are your thoughts to it.

  2. JP

    Nitin Gulati,
    I think you’re asking the right questions. There are many ways to design macro risk benchmarks, and it’s worthwhile to explore the possibilities. I look at a number of additional indicators beyond what I publish on The Capital Spectator. That said, MMRI is a simple, intuitive measure, and one that’s easily replicated. But I’m constantly playing with the data and considering modifications. For example, another number to consider: the VIX.

  3. Nitin Gulati

    I don’t think adding VIX will be a value add to indicator , adding ” SKEW” to it adds more value. VIX if often reactive where as actions in SKEW clearly demonstrate investors activity towards buying protection before hand.
    My area of expertise is volatility trading and recently i took few classes on macro economics which has sparked an immense interest in me for putting macro into perspective in trading and investing. I would love to team up with guys like your self to develop a more thoughtful and broader understanding of macro issues and also share ideas and structuring trades on that basis.

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