LPL’s Current Conditions Index Falls 13 Points Amid Downward Movement by LPL Financial

Over the past week, the LPL Financial Current Conditions Index (CCI) fell 13 points to 249.

While the Current Conditions Index has shown some downward movement since its June 2014 multiyear high, it still sits at the peak levels established between the Great Recession and the end of 2014’s unusually cold and snowy weather. It remains consistent with the U.S. economy emerging from the modest, but steady, economic growth of recent years.

Current Conditions Index

During the last week, a rise in the VIX, a measure of equity market volatility, contributed most to the decline, while jobless claims made the largest positive contribution.

Current Conditions Index

How to Use the CCI

The Current Conditions Index is a weekly measure of the conditions that underpin our outlook for the markets and economy. It provides real-time insight into the trends that shape our recommended actions to manage portfolios and has proven to be a useful investment decision-making tool.

This index is not intended to be a leading index or predict future conditions; it is a coincident measure of where they are now. Because our index is tailored to the current environment, the components of the CCI are periodically changed to retune the index to those factors most critical to the markets and economy, so it may continue to be a valuable investment decision-making tool.

How the Index Is Constructed

To create the index we found 10 indicators that provided a weekly, real-time measure of the conditions in the economic and market environment. We then standardized these components compared with their pre-crisis 10-year average, equally weighted their standardized scores, and aligned the resulting index with zero at the start of 2009. These components capture how the conditions are evolving from a wide range of angles and are each described below.

Current Conditions Index Components

BAA Spreads: The yield on corporate bonds above the rate on comparable maturity Treasury debt is a market-based estimate of the amount of fear in the bond market. BAA-rated bonds are the lowest quality bonds still considered investment grade, rather than high-yield. Therefore, they best reflect the stresses across the quality spectrum. A rise in BAA spreads acts as a negative for the Current Conditions Index.

Business Lending: A good gauge of business’ willingness to borrow to fund growth, the Federal Reserve (Fed) tabulates demand for commercial and industrial loans at U.S. commercial banks. More borrowing reflects increasing optimism by business leaders in the strength of demand. A rise in loan growth acts as a positive for the CCI.

Commodities: While retail sales captures end-user demand for goods, commodity prices reflect the demand for the earliest stages of production of goods. Commodity prices can offer an indicator of the pace of economic activity. The CRB Commodity Index includes copper, cotton, etc. A rise in commodity prices acts as a positive for the CCI.

Fed Spread: A measure of future monetary policy, the futures market gives us the difference between the current federal funds rate and the expected federal funds rate six months from now. Typically, a rise in rate hike expectations weighs on the markets because higher rates increase the cost of bank borrowing and have tended to slow the growth in the economy and profits. A rise in the Fed spread acts as a negative for the Current Conditions Index.

Initial Jobless Claims: Measures the number of people filing for unemployment benefits. A rise in the number of new claims acts as a negative for the CCI.

Money Market Fund Assets: A measure of the willingness to take risk by investors, the year-over-year change in money market fund assets tracked by Investment Company Institute shows the change in total assets in cash equivalent money market funds. A rise in money market asset growth acts as a negative for the CCI.

Mortgage Applications: The weekly index measuring mortgage applications provides an indication of housing demand. With much of the credit crisis tied to housing, keeping tabs on real-time buying activity can offer insight on how the crisis is evolving. A rise in the index of mortgage applications acts as a positive for the Current Conditions Index.

Retail Sales: International Council of Shopping Centers tabulates data on major retailers’ sales compared with the same week a year earlier. This measures the current pace of consumer spending. Consumer spending makes up two-thirds of gross domestic product (GDP). Rising retail sales acts as a positive for the CCI.

Shipping Traffic: A measure of trade, the Association of American Railroads tracks the number of carloads of cargo that moves by rail in the United States each week. A growing economy moves more cargo. A rise in railroad traffic acts as a positive for the Current Conditions Index.

VIX Index: The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. While this is not necessarily predictive, it does measure the current degree of fear present in the stock market. A rise in the VIX acts as a negative for the CCI.