The spirits are spooked

Summary

• Although the Animal Spirits Index (ASI) remained positive in September, it fell to 0.1 from 0.69 In August. This is the largest change in the ASI since March 2020.

• All five components were subtractive in September.

• The dramatic slip reflects the cracks that are beginning to emerge in the economy.

The spirits are down for spooky season

The Animal Spirits Index (ASI) fell sharply to 0.1 In September from 0.69 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. September's slip is the largest change seen in the ASI since March 2020.

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.

All five components were subtractive in September. Financial markets were down on the month. The eminent risk of a government shutdown at the start of the fiscal year as well as ongoing debates about the path of Fed policy contributed to the downswing. The S&P 500 Index dipped by about 220 points in September, while the VIX Index increased almost four points. In the bond market, the yield spread narrowed to -94 bps in September from -113 bps in August. However, the still-deep inversion continued to weigh on the ASI.