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Do You See What L.E.I. See?

Investors frequently seek out specific data combinations that can serve as signals of turning points in an economy, and one of the most popular indicators is the Conference Board’s Leading Economic Index (LEI), which tracks ten barometers of economic activity such as building permits, average weekly initial jobless claims and interest rate spreads. Many investors consider the LEI to be one of the most reliable indicators for predicting economic downturns.


Since 1960, the average lead time between the LEI falling 5% and the start of a recession has been about three months, yet the Index dropped 5% in November 2022 and here we are, still waiting for a broad economic downturn.  In fact, the LEI decreased for 22 straight months through December 2023, continuing to signal a recession. Still, it’s worth noting that the most recent reading (December) indicated a slower rate of contraction, and six LEI components even delivered positive contributions, including rising stock prices, easing credit conditions, and fewer jobless claims.



So, is the LEI a broken indicator?  Maybe.  And is it helpful for individual investors?  Maybe… but probably not.


The recent business cycle has certainly been weird.  We’re still dealing with the economic fallout of Covid, which has caused data inconsistencies, policy distortions and cycle anomalies that have affected LEI components.  However, it’s possible that the LEI has been accurate all along:  the Index’s negative readings signaled a recession during Q1 of 2023, but the official arbiter of U.S. recessions--  the highly politicized National Bureau of Economic Research--  simply didn’t want to call it that. 

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It’s rarely helpful to act on macroeconomic indicators of any kind, LEI or otherwise, when it comes to your portfolio anyway.  Sure, the macroeconomy can have an impact on your financial situation, but your portfolio decisions should be driven primarily by your own personal microeconomy—  your risk profile and time horizon. 


The point is that there are always reasons not to invest.  Markets are at all-time highs, and that’s still not a reason to not invest.  All-time highs in the stock market are usually followed by more all-time highs; that’s just how it has worked for hundreds of years.


There are more stocks up over 30% since the beginning of the year than I can shake a stick at, and I hope you’ve been participating in these massive gains.  While it’s fair to say the pace of the moves has been a little surprising, what’s not surprising is the bullish trajectory, so if you were positioned correctly, the rate of the move should indeed be a very pleasant surprise.


Moreover, according to CFRA chief investment Officer Sam Stovall, of the 79 years since 1945, the S&P 500 rose in price in January and February just 37% of the time, and it looks like we’re on track for that to happen this year.  And when both months registered gains, the S&P 500 recorded a positive full-year total return 100% of the time, rising an average of 24%.


Stats like that one should lead you to be hopeful that stocks will continue to run higher.  Still, it’s not just history; our understanding of what is likely to happen as central banks lower interest rates in this environment is our primary reason for expecting additional gains this year.  When the Fed is cutting rates to support the economy, stocks are probably not doing very well, but according to JP Morgan, in instances when the Fed cuts rates outside of a recession, stock returns average over 30%.


Of course, there may be some volatility along the way.  Nvidia (NVDA) is now worth more than the entire China stock market (as measured by H shares in Hong Kong), and the S&P is trading 16% above its 200 day moving average.  The S&P 500 is up 14 of the past 15 weeks and is up more than 20% in just the last 15 weeks; in the entire history of the stock market, this has NEVER happened before. 


So things are a little frothy, and that’s ok.  If you’re a long-term investor, you should expect to see lots of new highs over the course of your lifetime, regardless of what the LEI sees or doesn’t see.





Click here to invest with Chad.



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