Investment Updates

The headlines are ugly. “Late Rally Lifts Stocks After S&P 500 Skims Bear Market,” according to WSJ.com’s top story after Wall Street closed today.  “Markets End Down for 7th Straight Week, Despite Late Rally,” according to NYT.com.

Stocks are at the edge of a bear market – defined as a loss of -20% from the last record-high closing price of the Standard & Poor’s  500 index (on Jan. 3). Not since 2001, The Wall Street Journal says, has the S&P 500 suffered a seven-week losing streak.

However, the economy is expected to grow +2.3% in 2022. That’s the forecast from The Conference Board, which designed the Index of Leading Economic Indicators for the U.S. decades ago and gathers data on its 10 sub-components every month. 

The LEI for the U.S. decreased in April, which obviously is not good news, but the dip followed two consecutive months of gains. Yes, the US LEI was essentially flat in recent months, but it is in line with a moderate growth outlook in the near-term, according to the economics team at The Conference Board, an association for the nation’s largest companies and an institution unique to America’s laissez-faire economy. 

“A range of downside risks—including inflation, rising interest rates, supply chain disruptions, and pandemic-related shutdowns, particularly in China—continue to weigh on the outlook,” according to Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Nevertheless, we project the US economy should resume expanding in Q2 following Q1’s contraction in real GDP. Despite downgrades to previous forecasts, The Conference Board still projects +2.3% year-over-year US GDP growth in 2022.”

Risk of a recession has risen, and  the weaknesses among the components of the 10 leading indicators outweighed the strengths in April, according to the Conference Board.  However, moderate growth is likely to prevail in the near-term.  The decline in the LEI was primarily driven by weak consumer expectations and a drop in housing permits. In the six-month period ended April 2022, the LEI increased nine-tenths of 1%, equivalent to about a 1.9% annualized rate. That’s half its +3.8% rate of growth over the previous six-month period, and equivalent to about +7.7% annualized growth.

The LEI plunged before every recession in modern history except for the Covid recession, and a bear market in stocks has been triggered by every recession in modern history except for the crash of 1987. That’s why the LEI an important forward-looking indicator of financial economics. 

The LEI is a broad indicator of what’s ahead, reflecting recent financial news because it is comprised of 10 components:  

1. average weekly hours worked in manufacturing  
2. average weekly initial unemployment claims 
3. manufacturers’ new orders – consumer goods and materials 
4. Institute of Supply Management index of new orders index 
5. manufacturing sector new orders, nondefense capital goods 
6. building permits – new private housing units 
7. stock prices, as measured by the S&P 500 
8. Leading Credit Index™  
9. interest rate spread of the 10-year Treasury Bond minus the Fed Funds Rate  
10. index of consumer expectations. 

The Standard & Poor’s 500 stock index closed this Friday at 3,901.36. The index gained +0.57% from Thursday and is down -3.1% from last week. The index is up +54.2% from the March 23, 2020, bear market low and down about -19% from the January 3rd all-time closing high. Sticking with a long-term plan can be hard in moments like this. We are here to help.

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