Leading Indicators for US Equities
The Big Picture has been a daily must read for me since before I even knew what a blog was. The opportunity to share ideas and information has never been easier that it is today. Years after I began reading Barry's stuff I'm here now writing and sharing my favorite charts on my own blog. We've come a long way. Barry Ritholtz, author of The Big Picture and one of my favorite books Bailout Nation, did a Mid-Day Q&A session on @StockTwits Thursday. I didn't have to think much about it, my question to him was:
Because I've been reading Barry's work for a while I have a pretty good idea about what his thoughts have been in the past. I know what he thinks about the 2008 debacle and what got us there. Whats important now is to find out what he is looking at going forward. What is something he can share with us to help in the future?
In an instant, thanks to @Stocktwits, I had to answer to my question. What is a guy like Barry looking at to help him navigate through the US Equities Markets? His answer didn't surprise me, but certainly made for a good post full of charts. Let's break it down one by one:
1) The Conference Board Leading Economic Index (LEI) - The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The Top 10 components include: The Average weekly hours (manufacturing), Average weekly initial claims for unemployment insurance, Manufacturers’ new orders (consumer goods and materials), Index of supplier deliveries – vendor performance, Manufacturers' new order (nondefense capital goods), Building permits (new private housing units), Stock prices (500 common stocks), Money supply (M2), Interest rate spread (10-year Treasury bonds less federal funds), and the Index of consumer expectations.
According to the Conference Board's most recent Press Release, the U.S. increased 0.8 percent in May to 114.7, following a 0.4 percent decline in April, and a 0.7 percent increase in March. The largest contributions came from the interest rate spread, consumer expectations, and housing permits. Here is the chart via Professor Mark J Perry:
2) Retail Sales - These figures are vital to stock investors as a whole, and especially to those who invest in retail companies directly. They are also are a big component of total gross domestic product (GDP) in the United States, so any extended drop-offs in retail spending can trigger a recession by lowering tax receipts and forcing companies to reduce head counts. As far as broad economic indicators go, the retail sales report is one of the most timely, providing data that is only a few weeks old.
According to the U.S. Census Bureau's most recent report, advance estimates of U.S. retail and food services sales for May were $387.1 billion, a decrease of 0.2 percent from the previous month, but 7.7 percent above May 2010. Here is the chart via Calculated Risk:
3) ECRI Weekly Leading Index is a rolling growth rate of a weekly index and not a monthly snapshot like the LEI. So it’s a lot smoother, though the underlying indicators in both are probably not much different. According to the Wall Street Journal, the Economic Cycle Research Institute’s index fell again last week, and its rolling growth rate dropped to 3.7%, the lowest since late January.
Barry Ritholtz has given us a little insight into his favorite leading indicators and for that we thank him. I've been a big fan of the Big Picture for a long time and continue to believe the site is a daily Must Read for anyone with market exposure. You can follow him on StockTwits @Ritholtz. Thanks again Barry for answering my question during the Q&A. Here is the Full Transcript
JC
Sources:
US LEI Increases Press Release Friday June 17, 2011 (The Conference Board)
Leading Economic Index Points to Ongoing Economic Growth (Mark J Perry)
Retail Sales Declined 0.2& in May (CalculatedRisk)
US Census Bureau News June 14, 2011 (US Census Bureau)
ECRI Weekly Leading Index - 8 Weeks of Declining Growth (dshort)