Short-term outlook shaky for animal spirits
|Summary
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The Animal Spirits Index (ASI) fell in September to 0.65 from 0.78 in August but remains elevated from a historical perspective.
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Every component was subtractive in September, with the exception of the S&P 500 Index.
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While the ASI may fall further this year, there is little cause to believe it will dip into the red, as economic growth continues to run at a sturdy pace. That said, the upcoming presidential election and its aftermath may create volatility in the near future.
September blues
The Animal Spirits Index (ASI) fell to 0.65 in September from 0.78 in August. Previous reports detail the index methodology, but on a basic level, an index value above zero indicates optimism and a value below zero suggests pessimism.1 With the U.S. presidential election around the corner, uncertainty is reflected in many of the index's components and contributed to the dip in spirits this month.
The ASI consists of five indicators: the S&P 500 Index, the Conference Board’s Consumer Confidence Index, the yield curve (the spread between the 10-year and three-month Treasury yields), the VIX Index and the Economic Policy Uncertainty Index. The policy uncertainty and VIX indices inversely affect the ASI. In other words, a rise in uncertainty or volatility decreases the index, while a fall increases the index, all else equal.
Every component contributed negatively to the index in September, with the exception of the S&P 500 Index. The equity market's optimism has not been shared by the bond market. The yield spread between the 10-year and 3-month Treasuries remained negative in September, though it narrowed to -100 bps from -118 bps in August. The stock market provided a bit more relief to the ASI over the month as the S&P 500 Index rose roughly 114 bps to reach another record high. Year-to-date, the index is up 19% and has contributed positively to the ASI for eight of the nine months of 2024. That said, stock market volatility also rose over the month, and the VIX Index reached its highest level since October of last year.
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