The Conference Board Index of Leading Economic Indicators (LEI) has a very good track record in forecasting recessions …
It gave advance
warnings for each of the past eight U.S. recessions including the
double-whammy recession of the early 1980s and the recent one.
That's why I believe that it may be a good idea to keep following this indicator's readings.
I prefer the
LEI's year-to-year percent change to get a glimpse of the U.S.
economy's future. During the current business cycle this version of the
indicator made its low in March 2009 at -4 percent. From there it
improved every month and turned positive in July. This indicated that
an economic rebound had started.
Indeed, GDP grew by 3.5 percent in the third quarter!
And While the Growth Isn't Genuine,
The Market Doesn't Really Care Now …
As some very good
economists have pointed out, this growth is mainly due to government
stimulus. This means we're dealing with an economy on life support.
I don't expect a
genuine and durable boom to start any time soon. The huge balance sheet
problems in the private sector and especially in the banks have not
been solved. So I suspect they'll haunt us again, probably in the
second half of 2010. At least that's what the current LEI readings are
telling me.
At the same time, the LEI doesn't differentiate between genuine growth and government-stimulus-based growth.
And the stock
market doesn't care, either — at least in the short to medium term as
the monster rally off of the March lows has shown.
So as an investor, I'm not very worried right now about any future setbacks that the economy is likely to suffer.
Currently the LEI
is still pointing to a continuation of the economic rebound. After
rising 1.9 percent in August it accelerated again in September … up 2.9
percent. It's also important to note that eight of the LEI's ten
components contributed to this rise, which makes its positive message
even more valid.
Bottom line: I
cannot see any reason to distrust this time-proven-indicator's bullish
message. Therefore, I expect the rebound to continue.
In last week's Money and Markets column,
I wrote about the technical setup that was signaling a stock market
correction. Now that the correction has started, some shorter-term
indicators are already entering oversold territory.
As I said last
week, I expect a somewhat larger correction here, some 10 to 15
percent. So I don't think it's time to jump in with both feet yet.
But after this
correction has run its course — probably in two to four weeks — I
expect the medium-term uptrend that started in March to resume.
This expectation
jibes well with the LEI and my medium-term technical indicators. What's
more, comparing last year's severe sell off and this year's monster
rally to similar historical examples supports this forecast.
Best wishes,
Claus
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