Track Public Confidence Daily

by Charley Kyd on October 21, 2011

When you’re planning for your company’s future, it would be great to have an accurate and current indication of how optimistic or pessimistic the public is about future economic performance.

The Conference Board, the University of Michigan, Rasmussen Reports, and others publish monthly surveys of consumer sentiment. Unfortunately, these surveys have at least two limitations from the perspective of many Excel users in business. First, they both charge a subscription fee for the data. And second, the data only is available monthly.

But there’s another way to learn what the public thinks about the economy, as shown here:

Here, the light blue jagged line shows actual index values, and the dark blue smooth line shows the general trend in thee values. I generated the data for the smoothed line using the KydWeb_Smooth function.

Here’s how this index works:

If investors are optimistic about the future, they’re more likely to invest in high-interest bonds issued by lower-quality, higher-risk companies. If they’re pessimistic about the future, they forgo the high interest rates of those high-risk companies (rated BBB or CCC) and instead invest in lower-yield, but lower-risk companies (rated AAA).

Therefore, the relative prices of the AAA, BBB, and CCC bonds provide an accurate indication of how confident investors are about the future of the economy.

The Barron’s Confidence Index uses the same approach to gauge public sentiment. It measures the ratio of the average yield on 10 top-grade bonds to the average yield on 10 intermediate-grade bonds. Again, however, the data isn’t freely available.

So I’ve defined my own index that follows this same approach but uses public data. I modestly call it the Kyd Index of Public Confidence.

Here’s how it compares to the Producer and Consumer indexes from Rasmussen Reports:

The Kyd Index is flatter than Rasmussen's Consumer and Producer indexes, but tells a similar story.

The indexes for September, 2011, were at or near their all-time lows. However, the first figure shows that over the past 21 days, the Kyd Index has increased slightly.

How to Calculate the Kyd Index of Public Confidence

The FRB database offers three useful data series (prepared by Merrill Lynch) about the yield of corporate bonds:

  • BAMLC0A1CAAAEY—BofA Merrill Lynch US Corporate AAA Effective Yield
  • BAMLC0A4CBBBEY—BofA Merrill Lynch US Corporate BBB Effective Yield
  • BAMLH0A3HYCEY—BofA Merrill Lynch US High Yield CCC or Below Effective Yield

All three of these series have been updated every workday since December 31, 1996. The data is immediately available using KydWeb. And you don’t need to know anything about corporate bonds to use it.

You can calculate three versions of the index, which I call AB (divide AAA by BBB), AC (divide AAA by CCC), and BC (divide BBB by CCC). The chart above shows the AB version, but you might experiment with all three to see which version you find most useful.

The general formulas for returning the AB version for any date are…

=KydWeb_Actual(“FRB”,”BAMLC0A1CAAAEY”,”1/1/2011″)
=KydWeb_Actual(“FRB”,”BAMLC0A4CBBBEY”,”1/1/2011″)

…where the 3rd argument can be a date serial number, a date as text, an index number, or a backindex number. (Backindex numbers are explained in the documentation.)

The index for any date is equal to 100 times the result of the first formula divided by the second.

When you get the chance, test this index for yourself. I think you’ll find it useful.

Previous post:

Next post: