Friday, 22 April 2005

Leading index and the stock market

Yesterday, the Conference Board announced that the US leading index decreased 0.4 percent to 115.1 in March. It had increased 0.1 percent in February and decreased 0.3 percent in January. During the six-month span through March, the leading index decreased 0.3 percent.

The leading index declined in March following a small increase in February. The leading index has been essentially flat since October 2004 following a small decline over the previous five months. In addition, there have been more weaknesses than strengths among the components of the leading index in recent months.

... The recent flatness of the leading index (compared to its long-term trend of 1.5 percent growth) is consistent with the economy continuing to expand in the near term, but more slowly than its long-term average rate.

Barry Ritholtz gives his take at The Big Picture.

This is not an economy hitting a soft patch; rather, it is a choppy expansion with fading momentum. Higher energy prices, commodity costs, interest rates and taxes are not helping; Consumer confidence has faded and Business spending and hiring is (mostly) MIA.

Lastly, earnings have been very good -- but that's very much expected. Yesterday's CNBC poll had 3/4s of viewers expecting earnings to help the market. That suggests that good earnings are already factored into the market. Note that the year-over-year earnings gains for the S&P500 -- earnings momentum -- has been steadily fading since Q3 2003 (almost 30%) to Q1 2005 (12%). That ain't good either.

Talking about leading indicators, Calculated Risk puts the common wisdom that the stock market predicts recessions into perspective.

We might see a recession in 2006, but the markets are not a good predicting tool... The best that can be said for the market is that it is a solid coincident indicator of a recession... [In] the 1990's recession...[the] SP500 rallied into the recession and only sold-off after the recession started.

I would add, though, that Calculated Risk's own chart shows that the market flattens out a few months before the recession. Some would take that as an indication too.

2 comments:

Barry Ritholtz said...

"the markets are not a good predicting tool"

Aint that the Truth?

Checkout this rally comparison -- 4 failed rallies since the 2000 crash were each hailed as incontrovertible evidence of an economic recovery (not)

http://bigpicture.typepad.com/comments/2003/07/rally_compariso.html


Also, I never finished a lament about prediction markets (Its in preview mode here: http://bigpicture.typepad.com/comments/2003/08/terrorism_futur.html) -- but its got tons of good links if you want to use it as a place to start researching the topic

lim said...

Barry

Very interesting. And yes, the links are great.

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