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METHODOLOGY · INDICATOR

Macro Stress

The economy is the tide, and bubbles need a rising tide.
WEIGHT
20%

WHAT WE MEASURE

Macro Stress captures how healthy the broader economy is and whether monetary policy is tightening into a slowdown. It focuses on leading indicators (signals that change before the broader economy turns) and is designed to flag stress 6 to 18 months before it becomes visible in corporate earnings or unemployment data.

WHY IT MATTERS FOR BUBBLE DETECTION

Bubbles rarely burst in isolation. They almost always coincide with a macro turning point: rising rates choking off cheap money, or credit conditions deteriorating before equity prices reflect it. The yield curve has preceded every US recession since 1955 with no false negatives, making it one of the most reliable macro signals in financial history.
Indicators are normalised relative to their own 20-year history. An inverted yield curve, tightening Fed, and falling Leading Economic Index all contribute positively to the stress score. The stress component has a natural 6–18 month forward lag relative to actual economic turning points.

KEY METRICS & THRESHOLDS

Yield Curve (10Y – 2Y)
The spread between 10-year and 2-year US Treasury yields. When short-term rates exceed long-term rates (inversion), the market is pricing in future rate cuts, typically because it expects a recession. This signal has preceded every US recession since 1955, with an average lead time of 12–18 months.
SOURCE: US Treasury / FRED (DGS10, DGS2); NY Fed Recession Probability Model
Steep (Strong Growth)
> +150bps
Normal
+50 to +150bps
Flat (Caution)
0 to +50bps
Inverted (Warning)
-50 to 0bps
Deeply Inverted
< -50bps
Federal Funds Rate (Real)
The Fed's policy rate minus inflation (CPI). When the real rate is sharply positive and rising, borrowing is genuinely expensive: this tightens financial conditions and raises the discount rate applied to future earnings, pressuring equity valuations.
SOURCE: Federal Reserve (federalreserve.gov); BLS CPI-U
Accommodative
< 0%
Neutral
0 – 1%
Mild Tightening
1 – 2%
Restrictive
2 – 3%
Very Restrictive
> 3%
Conference Board LEI
The Leading Economic Index, a composite of 10 forward-looking indicators including manufacturing hours, building permits, consumer expectations, and credit conditions. Three consecutive monthly declines have historically signalled a recession within 6–12 months.
SOURCE: The Conference Board (conference-board.org)
Expanding
Rising MoM
Slowing
Flat (±0.1%)
Contracting
1–2 months declining
Recession Signal
3+ months declining

HISTORICAL EPISODES

Dec 1999
Pre Dot-com
SIGNAL
Yield curve inverted; Fed tightening aggressively
OUTCOME
Nasdaq fell 78% over 2000–2002
Aug 2006
Pre-GFC
SIGNAL
10Y–2Y inverted; LEI declining 6 months
OUTCOME
S&P 500 fell 57% over 2007–2009
Aug 2019
Pre-COVID (brief inversion)
SIGNAL
Yield curve briefly inverted
OUTCOME
Mild recession in 2020 (COVID accelerated)
Mar 2022
Inflation Shock Tightening
SIGNAL
Most aggressive Fed hike cycle since 1981; curve inverted to -100bps
OUTCOME
S&P 500 -25%, bond market worst year in 100+ years

HOW TO INTERPRET THE SCORE

Benign
0 – 25
Macro environment is supportive. Economy is healthy and policy is accommodative.
Cautious
25 – 50
Some signals of tightening or slowdown. Risk of deterioration in 6–12 months.
Stressed
50 – 75
Multiple indicators flashing warning. Recession probability is elevated.
Critical
75 – 100
Conditions consistent with late-cycle or recession onset. Historical analog: pre-2008.

ACADEMIC & INDUSTRY SOURCES

[1]
Estrella, A. & Mishkin, F.S.: Predicting U.S. Recessions: Financial Variables as Leading Indicators1998
[2]
Friedman, M.: A Program for Monetary Stability1960
[3]
Federal Reserve Bank of New York: Yield Curve as a Predictor of RecessionsUpdated quarterly
[4]
The Conference Board: US Leading Economic Index MethodologyOngoing