The Indicator Snapshot

It is important to keep the current news in perspective. I am always searching for the best indicators for our weekly snapshot. I make changes when the evidence warrants. At the moment, my weekly snapshot includes these important summary indicators:

  • Market valuation, reflected in the difference between ten-year note yield and the yield on expected S&P 500 earnings for the next twelve months.
    • Forward earnings information comes from Brian Gilmartin and FactSet.
    • The equity risk premium reflects the difference between these yields.
  • Financial risk is drawn from the St. Louis Financial Stress Index.
  • An updated analysis of recession probability from the leading sources.
  • Anticipated inflation is calculated from the difference between Treasury notes and TIPS.
  • Historical volatility is calculated from market data.
  • Market trends are drawn from our proprietary technical indicators.
  • Everything else is updated weekly from public market data.
  • Overall outlook is a conclusion for long-term investors — not immediate trading.

Financial Risk

The SLFSI reports with a one-week lag. This means that the reported values do not include last week’s market action.

The St. Louis Fed’s Financial Stress Index has been changed to Version 2.0.  The effect is shown in the chart below.  It can be annoying when a method is altered, but it can be necessary to capture real-world changes.  The chart shows that the new indicator, while still in the safe zone, would have been less comforting than the former version over the last few years.

The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events.  It uses data, mostly from credit markets, to reach an objective risk assessment.  The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.

Recession Odds and Market Outlook

I feature the C-Score, a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.”  I have now added a series of videos, where Dr. Dieli explains the rationale for his indicator and how it applied in each recession since the 50’s.  I have organized this so that you can pick a particular recession and see the discussion for that case.  Those who are skeptics about the method should start by reviewing the video for that recession.  Anyone who spends some time with this will learn a great deal about the history of recessions from a veteran observer.

Georg Vrba’s four-input recession indicator provides near-term odds.  Georg has other excellent indicators for stocks, bonds, and precious metals at iMarketSignals.

Jill Mislinski updates the Doug Short charts, including updates major economic series. This includes the best chart update of the major indicators used by the NBER in recession dating.