The latest reading on leading indicators came in at +1% – the best reading since 2005.
With the S&P 500 as one of the 10 components of the index and a 40% move in stocks the stock market actually contributed 50% of the improvement in leading indicators. David Rosenberg refers to this as “double counting”. Regular readers know I am not a big proponent of the stock market’s ability to forecast anything. Markets in general are notoriously irrational for simple reasons – the summation of the thoughts of its users are generally irrational because human emotion is irrational. Many market participants believe the stock market forecasts out a year or longer, but as I’ve argued before, I don’t believe the stock is a good forecaster of anything further out than one quarter ahead.
So you have to wonder now, assuming the stock market isn’t in fact a great leading indicator, how useful is the leading indicators statistic as a barometer of future growth when 50% of a particular reading can be based on past performance of a lone stock index? I’d say not very useful….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Onlooker
Exactly. I chuckled when I saw this come out and thought about the stock market reacting to it positively. Talk about circular logic; i.e. stocks should go up because stocks have been going up. Same goes for the consumer sentiment readings.
The other part of the LEI that contributed to the positive reading is interest rates. But considering how they are being manipulated and very artificially influenced (more than usual) by Fed actions, it’s hard to take that part seriously in the absence of anything else substantive.