August 18th Weekly Market Update
Since the dawn of financial markets, investors have been searching for signals of impending declines. Many economic indicators correlate highly with the stock market, which means they are coincident and not leading, and they tend to move at the same time as stocks. Some are lagging, meaning they move after stocks, which of course is not very predictive. An important goal for all investors is to find leading indicators in an attempt to anticipate big down moves.
One leading indicator that we have found with reliable predictive power is the Conference Board Index of Leading Economic Indicators (LEI). It is always difficult to predict small stock market pullbacks, such as the two 4 – 6% drops that the S&P 500 Index has experienced in 2014. Such pullbacks can be driven by temporary fears and can contrast with the fundamental underpinnings of the market. Larger, longer-lasting pullbacks are usually driven by deteriorating economic or fundamental data that can be foreshadowed by the LEI. The LEI data for July are due out on Thursday, August 21, 2014. (Note that the stock market is one of the 10 components of the LEI, though that does not detract from its usefulness as a predictor. Stock market movements and the nine other components of the index have proven to be a powerful combination.)
Predictive Power of the LEI
The LEI is comprised of 10 primarily fundamental economic indicators and is designed to predict the future path of the economy, with a lead time of between six and 12 months. When the year-over-year rate of change in the LEI turns negative and begins to fall, a recession has historically followed within the next 14 months.
For the full article: Crystal Ball?