In early September I asked readers to look at two charts and say which one was the ECRI’s Weekly Leading Index and which was the S&P 500. It’s practically impossible to tell them apart and readers had no luck guessing which was which. Well, this morning the ECRI reported their WLI again and, surprise surprise, it hit its highest levels since May when the stock market peaked. Of course, the stock market has been rallying alongside the index.
This all makes one wonder – what good is a “leading indicator” that simply mirrors the stock market? How is this useful? Do past market prices reflect future price action? The ECRI sells their index as a “leading indicator of economic growth”, but I have no idea how a leading indicator, that perfectly reflects the stock market’s performance, is even remotely useful. We know equity prices are a component of the ECRI’s index, but it looks to me like the ECRI’s leading index IS the stock market.
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.
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