The chart above shows two different statistical measures of financial stress that are updated weekly by the Federal Reserve district banks of Chicago (National Financial Conditions Index, red line) and St. Louis (Financial Stress Index, blue line). I reported on the St. Louis Fed Financial Stress Index yesterday, and have now added the Chicago Fed’s National Financial Conditions Index to the chart above.
Here are descriptions and more details on each financial stress index:
1. The Chicago Fed National Financial Conditions Index (NFCI) is based on 100 financial indicators consisting of 47 weekly, 29 monthly, and 24 quarterly variables, and has proven to be a highly predictive and robust indicator of financial stress at leading horizons of up to one year. Empirical analysis indicates that the NFCI is 95 percent accurate in identifying historical crises contemporaneously. Increasing risk, tighter credit conditions and declining leverage are consistent with tightening financial conditions are associated with positive values for the NFCI, while negative values indicate the opposite. The NFCI has been negative for more than three years, and has been trending downward since mid-2011 (see red line in chart). The NFCI has been below -0.70 for the last four weeks, which indicates that the stress in US financial markets is at the lowest level since the summer of 2007..
2. The St. Louis Fed Financial Stress Index (STLFSI) is calculated using the principal components procedure based on 18 weekly data series that include seven interest rates, six yield spreads, and five other financial variables. As I reported yesterday, the STLFSI has been steadily trending downward (lower values indicate less stress) for more than a year starting in October 2011 when the index was at 1.0. For the most recent week, the Financial Stress Index fell to -0.536, which is the lowest level since early August 2007, before the Great Recession and financial crisis.
Further evidence of financial stress and volatility returning to pre-recession 2007 levels is provided in the chart below, which adds the CBOE Volatility Index (VIX), as another measure of financial conditions (see blue line) to the two financial stress indexes described above. The VIX, sometimes referred to as the ”fear index,” measures the stock market’s expectation of the volatility in stock prices over the next 30-day period. In recent weeks, the VIX has fallen below 13.0 for the first time since May 2007. The VIX today has risen to 14.37, but is still at the lowest level since late May 2007.
Bottom Line: Based on three different statistical measures (St. Louis Fed Financial Stress Index, the Chicago Fed National Financial Conditions Index and the CBOE Volatiltiy Index), the stress and volatility in the U.S. financial system has returned to the pre-recessionary, pre-financial crisis levels of 2007.