Macro-Markets Risk Index | 6.21.2013

A markets-based profile of US economic conditions continues to deteriorate in June, although business cycle risk still looks low from an historical perspective. Nonetheless, the Macro-Markets Risk Index (MMRI) closed yesterday (June 20) at 7.6%, the lowest since last August. The sharp decline in MMRI in recent weeks looks troubling–if it continues. For now, the index is still well above the danger zone of 0%, although the margin of comfort is shrinking rapidly. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, 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 reports are published with a time lag. MMRI is intended as a supplement for developing perspective on the current month’s economic profile until a complete data set is 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 that 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 June 20:

1. The credit spread data uses a 260-day window rather than a 250-day window that’s used 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 for the high-yield numbers to approximate a one-year period that aligns with the one-year (250-day) window used for stocks and oil prices, which aren’t published on weekends. ^