Macro-Markets Risk Index | 7.16.2013

US economic conditions continue to stabilize at relatively lower levels vs. the first five months of 2013, according to a markets-based profile of the macro trend. The deterioration that persisted through most of June has faded in recent weeks, giving way to a comparatively subdued trend. Despite the sharp decline in the Macro-Markets Risk Index (MMRI) in June, this benchmark closed yesterday (July 15) at 8.8%–a level that suggests that business cycle risk remains low. Although MMRI is near its lowest value since last August, it remains well above the danger zone of 0%. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply 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, plotted daily
• Credit spread (BofA ML US High Yield Master II Option-Adjusted Spread), inverted 260-trading day % change, plotted daily 1
• Treasury yield curve (10-yr Treasury yield less 3-month T-bill yield), no transformation, plotted daily
• Oil prices (iPath S&P GSCI Crude Oil Total Return Index ETN (OIL)), inverted 250-trading day % change, plotted daily
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 a closer review of how MMRI stacks up so far this year:

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. ^