MSG Capital Markets Index Methodology
Inputs
The MSG Capital Markets Index is comprised of three debt and equity capital markets inputs, each accounting for 1/3 of the weight for the total index:
1. Credit spreads on high yield corporate debt. This input tracks the spread of high yield corporate bonds relative to US Treasuries of the same maturity. Prior to previous recessions, credit spreads have typically widened out to 6-10% and sustained that level for several months*. (Click Here to view the data source and full index methodology.)
2. Growth vs. value relative performance. This input compares the year-over-year performance of three ETFs in historically high beta industries relative to the year-over-year performance of three ETFs in historically low beta industries. When investors are bracing for a recession, we would expect to see a rotation into more defensive sectors such as utilities and consumer staples. Full list of ETFs below:
3. Total stock market performance. This input is the year-over-year performance of the S&P 500, as tracked by the SPDR S&P 500 ETF (SPY).
Adjustment/Scaling:
Since capital markets are historically more volatile than the WEI, we adjusted year-over-year credit spread changes and equity market returns to align with WEI and allow for a more direct comparison.
For example, the S&P 500 has been ~3.5x more volatile than the WEI on a weekly basis since the start of 2021. Therefore, actual year-over-year changes in the SPY are divided by 3.5 to calculate the adjusted value. Similar methodology is used to adjust the year-over-year credit spreads and individual ETF returns.