Macro Index

[wpdatachart id=99]
Falling below 0.5 = danger zone

Description

The Macro Index combines leading economic indicators to determine the state of the U.S. economy. A reading of 1 means that the U.S. economy is in excellent shape, and a reading of 0 means that the U.S. economy is in terrible shape.
The Macro Index is upper-bound at 1 and lower-bound at 0. This means that it cannot rise above 1 and it cannot fall below 0.

So how can you use the Macro Investing Index to invest in the U.S. stock market? Afterall, this is based on leading macro economic data.
As we’ve demonstrated repeatedly here at Bull Markets, leading economic indicators are also leading stock market indicators because the stock market and the economy move in the same direction in the long term. This is how you know if the stock market’s decline is a correction, or the start of a much bigger bear market (e.g. a 30%+ decline).

  1. A 10-20% decline without significant macro deterioration = a correction. The economy is the dog, and the stock market is the tail. Sooner or later, the dog is going to wag the tail.
  2. A 10-20% decline with significant macro deterioration = the start of a much bigger decline, possibly 30%+

*Ray Dalio also supported this idea in this book Principles. He said that “economics usually leads politics, because politicians REACT to the economy”. This is generally true. The Fed is “data dependent”. This is why trading by “guessing what the Fed will do” is silly, to say the least. The Fed follows the data, so you should too. Look at the data, and you’ll mostly know what the Fed is going to do.

How to Zoom & Scroll

Zoom in/out: using your mouse, click & select an area of the chart
Scroll left/right: click SHIFT (on your keyboard) and drag the chart left/right using your mouse AT THE SAME TIME

14 comments add yours

    • It is October 31. To be used for the month of December.
      Sorry, the charting software I’m using defaults to the first day of every month. It’s an annoying glitch, which I am trying to fix.

  1. 1. Troy, I appreciate it that you don’t reveal the algorithm of calculating the index, but what quantitative factors are taken into account? And same question for long-term risk factor.
    2. What, in your opinion, are the odds of repeating the 1994-95 scenario, when this index was also pretty low, and the yield curve inverted – but then steepened again, and 1995 proved to be a crazy rally? What was in place then which is not now, and vise versa?
    Thanks!

    • Hi Oskar,
      1994-1995 scenario is unlikely, because the economy is much more maxed out today than it was back then. It has nothing to do with the yield curve

  2. Troy, according to your charts, Macro actually improved from September to October (0.73 vs. 0.68), and Long-Term Risk’s latest reading is marginally lower than the previous one – so why do you sound more alarming now than you did a month ago? Then you were quite firm that this is just a correction, now I hear serious doubts. What other factors made you switch from “Med-term IS bullish” to “LEANS bullish”?
    The latest data for Long-Term Risk is as of August. What is it at now? How close are we to the line on the sand?
    Have to note that all the way after August you have been fairly upbeat – how does it sit with knowing that the Long-Term Risk is at 0.7?
    LT Risk for May’18 (previous correction still underway) = 0.6992; for August (latest data on your chart) = 0.6968, i.e. lower. But you claimed that you were not concerned about the previous correction but are concerned now – why? And all the LTR numbers for 2018 are so close that the difference is really within the statistical error tolerance. Was there any sharp leap since August? If so, where are we now for LTR?
    Thanks!

    • Hi Oskar,
      The data for Macro is released with a 1 month delay. E.g. November’s data is released throughout December.
      As for the long term risk index, it’s not an exact science. It needs to be edited. But the point is clear, from 2017 – present, long term risk has been quite high ,particularly this year.
      The main difference between now and early this year is Macro. Macro had no problems this year, but looking at how December 2018 and January 2019 data is shaping up, it’ll probably get a little worse
      With that being said, not turning long term bearish. Kind of a “wait and watch” mentality.

  3. Hi Troy,
    When you construct this index and run backrest, how would you handle the different lags of macro data?Such as CPI data publish much later than the job data for the same month.
    And once the initial data published, there were lots of up- or down-adjustments later? Do you think it would affect the model?
    Many thanks,
    Nathan

    • Hi Nathan,
      All the data I use is monthly, and is released within 1 month of the date. E.g. all of October 2018’s data is released before the end of November 30, 2018.
      So far, I have merely used the last date of the next month when backtesting. E.g. September 2018’s data is used for November 1 – November 30, October 2018’s data is used for December 1 – December 31
      This way it accounts for the data lag
      As for the adjustments, I am only going to use the initial reading. Some data is adjusted upwards while others are adjusted downwards. On balance, things should cancel eachother out.

    • More than a dozen. I’ve seen models that incorporate 40 different indicators, which just seems like curve fitting to me.

    • It improved for the month of January, will probably deteriorate a little for the month of February.

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