Is the Index of Leading Economic Indicators Useful?

by | Jul 17, 2018 | Investor Behavior

Historically speaking, recessions have been bad for stocks. One way to “catch a glimpse” of whether the economy is nearing a recession is to follow the index of Leading Economic Indicators. Examples of “leading” indicators would be:

  • Jobless claims,
  • Wage growth (or a lack of wage growth),
  • What are purchasing managers doing,
  • How is consumer confidence?

Thanks to our friends at Dorsey Wright, we’ve pasted below a graph showing the year-over-year change in the Index of Leading Economic Indicators.  Look at how these indicators slipped in 1989 (into 1990), slipped again in 2000 (into 2001), and slipped again in 2006.  Each of these times, the economy landed in a recession and the market fell.

But these leading indicators are not “fool-proof” either.  See how these indicators slipped (but did not drop into negative territory) in 1998, 2003, 2011-12 and again in 2016.  No recessions during those time frames.  But the markets (sometimes) behaved ‘as-if” we were headed for a recession.

It’s dicey (and a bad plan) to use a “simple” set like the index of leading economic indicators as an on/off switch for making investment portfolio changes.  It becomes too easy to simply “anticipate” changes in the index (or make a forecast).  This can often lead to bad decisions (bad outcomes) for you.

The main take-away for today (in 2018): we were closer to a recession in 2016 than we are today in 2018.  But it does NOT mean the market will be all purple pansies, pink elephants and rainbows.   We still have a lot of work to do.


Leading Economic Indicators

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