Leading Economic Indicators Point
to a Continuation of the Economic Rebound
by
Claus Vogt
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 ...
|
 |
|
Government stimulus is keeping the economy afloat. |
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.
|
 |
|
This medium-term rally is not over yet. |
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 |
