Methodology: how the three headline answers are built and tested
Updated 2026-09-27
The home page answers three questions every day. Each answer groups related signals into themes, lets each theme vote, and turns the votes into one word. The rules below are generated from the same code that produces the answers.
1. How stressed are conditions now? (Current stress)
Judged only on the level of stress, not how fast it is changing. Each theme takes its worst signal (green, yellow, orange or red) and casts its votes. The headline is the colour a second vote confirms, but one theme alone can lift it to one step below its own colour, so a lone inverted yield curve reads High, not Severe, while red credit spreads read Severe. Words: Low, Moderate, High, Severe.
| Theme | Signals · votes |
|---|---|
| Credit spreads | HY credit spread, IG credit spread (Baa) · 2 |
| Volatility & stress indexes | VIX, Financial stress index, NFCI · 2 |
| Yield curve | 10Y–3M spread, 10Y–2Y spread · 1 |
| Funding | SOFR funding spread · 1 |
2. Are conditions getting materially worse? (Momentum)
Each signal is compared with three months earlier; "materially" means a full colour step on its own scale. Each theme is worse or better by majority, and the headline counts themes: Worsening, Improving, Mixed or Stable. Rates, oil and the yield curve are left out: they warn a year or more ahead, so they say little about whether things are getting worse now.
| Theme | Signals |
|---|---|
| Credit spreads | HY credit spread, IG credit spread (Baa) |
| Volatility & stress indexes | VIX, Financial stress index, NFCI |
| Funding & liquidity | SOFR funding spread, Net Liquidity |
| Labor | Jobless claims, Sahm Rule |
| Yen carry | US 2Y – Japan rate gap, USD/JPY, Yen volatility, Yen short covering, Nikkei 225 |
3. Is pressure building toward a downturn? (Pressure)
The one forward-looking answer, from the signals with a record of leading recessions, combined like current stress. Words: Low, Building, Elevated, High.
| Theme | Signals · votes |
|---|---|
| Yield curve | 10Y–3M spread, 10Y–2Y spread · 2 |
| Jobless claims | Jobless claims · 1 |
| Financial conditions | NFCI · 1 |
Each signal's own warning levels are in the guides: private credit, liquidity & labor, market stress, yen carry trade.
How well do the answers work?
The rules were tested month by month from January 1988 to August 2026 (464 months).
- Current stress was tested against months when the Nasdaq was 20% or more below its one-year high (nine episodes). It scored an AUC of 0.83, where 0.5 is chance and 1.0 is perfect.
- Momentum was tested against months when the market fell a further 5 points below its high over the previous three months: AUC 0.76. It does not predict recessions (AUC 0.55 for one starting within a year), and is not meant to.
- Pressure was tested against a recession starting within 12, 18 or 24 months: AUC 0.81–0.83. It first turned Elevated or High 20, 14, 24 and 10 months before the recessions of 1990, 2001, 2008 and 2020. Its longest false alarm ran 29 months, ending in November 2024.
The weights beat counting every signal equally, but the data holds too few crises to tune them further, and the theme choices were made after a first look at these results, so the figures are not fully out of sample.
What this is not
These are simple, published rules meant to summarise conditions honestly, not a forecasting model and not investment advice. The quarterly private-credit indicators are left out of the daily answers because they measure slow structural build-up rather than current conditions.