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<\/p>\nU.S. stock market is itself a forward-looking instrument<\/p>\n
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Published: April 21, 2020 at 11:31 a.m. ET, By Mark Hulbert<\/p>\n
The huge drop in the Index of Leading Economic Indicators (LEI) is not as bearish as it otherwise seems. I\u2019m referring to the Conference Board\u2019s announcement at the end of last week<\/a> that its LEI index fell 6.7% in March, double the previous record of \u201cjust\u201d 3.4% that was set in October 2008, one of the darkest months of the Great Financial Crisis. This comparison suggests that what we\u2019re facing today is perhaps twice as awful.<\/p>\n That certainly seems scary, and the bears have made a big deal of it<\/a>. Fortunately, the data don\u2019t support as gloomy a scenario as many of those bears are painting.<\/p>\n That\u2019s because the U.S. stock market is itself one of the best leading economic indicators. By the time the latest LEI reading is released, it doesn\u2019t tell investors anything that isn\u2019t already well known and widely reflected in stock prices. Don\u2019t forget that just as the LEI fell by a record amount in March, so did the S&P 500.<\/p>\n Using the LEI as a stock-market timing indicator is about as helpful as driving while looking in the rearview mirror. This is not a criticism of the LEI; the Conference Board did not create the LEI to be a stock-market timing indicator and has not advertised it as such. The culprits in thinking otherwise are the stock market prognosticators who assign this meaning to the LEI without taking the trouble to analyze the historical data.<\/p>\n Consider the 10 economic recessions in the U.S. since 1950, per the National Bureau of Economic Research<\/a> (the semi-official arbiter of when recessions in the U.S. begin and end). In nine of those 10 cases, according to the calendar maintained by Ned Davis Research, a bear market began well in advance of those recessions. The lone exception came in 1990, when both the bear market and the recession began in the same month (July). (See chart below.)<\/p>\n How much of a lead time have bear markets had in advance of recessions? The average across all 10 bear markets since 1950 has been 7.9 months. No wonder the Conference Board includes the stock market as one of the 10 indicators it uses to construct its LEI.<\/p>\n \nThe stock market\u2019s ability as a leading indicator has actually increased in recent years.\n<\/p><\/blockquote>\n What is less well known is that the stock market\u2019s ability as a leading indicator has actually increased in recent years. We see this when measuring the strength of the correlation between the stock market\u2019s return over the trailing year and the LEI\u2019s percentage change over that same time period. From 1959 (when the LEI was created) to 2000, the r-squared (a measure of a correlation\u2019s strength) was a statistically significant but still modest 11%. Since 2000, in contrast, the r-squared of this correlation has jumped to 55%.<\/p>\n My analysis doesn\u2019t guarantee that we\u2019re in a bull market again, of course. The market might break below its Mar. 23 lows<\/a> (Dow DJIA at 18,591.93 and S&P 500 at 2,237.40). My point instead is that, if it does so, it will be because of what happens to the economy in coming weeks rather than because of what we already know \u2014 which is already reflected in current stock prices and the LEI\u2019s level.<\/p>\n The stock market is forward looking, after all. As an aside, let me ask that the bulls remember this the next time the LEI moves higher. Consistency requires that if they don\u2019t want to interpret a drop in the LEI to be bearish, they can\u2019t turn around and interpret a jump to be bullish.<\/p>\n Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com<\/em><\/p>\n Source: www.marketwatch.com<\/a><\/p>\n Read: Warren Buffett\u2019s favorite stock-market indicator \u2018scares the bejeezus\u2019 out of this investor<\/a><\/p>\n More: ?Are we overreacting to the coronavirus? Let\u2019s do the math<\/a><\/p>\n![\"Stock](\"\/blog\/wp-content\/uploads\/2020\/04\/MW-IE807_indica_20200420153014_ZG-1200x675.jpg\")
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