The most useful economic indicators for identifying turning points in an economic cycle are considered “leading” indicators because they tend to identify emerging trends. For instance, housing permits are a leading indicator of housing activity because builders must register for permits prior to beginning construction. Other categories of economic indicators are less valuable because they either describe what going on now (coincident), or what has happened in the past (lagging).
A familiar group of leading indicators are the 10 sub-components of the Conference Board’s Leading Economic Index (LEI). During the past 2 months, a meaningful proportion of these indicators have become less negative, signifying a slower pace of economic decline (note the Recent Trend column). Below is a summary chart:
Of course, there are no guarantees regarding the timing or magnitude of any potential economic recovery, but historical analysis of leading indicators shows that owning stocks in the early stages of an economic upturn often has led to favorable results. Certainly, investors should be cautious of waiting for all indicators to give a green light as this usually has occurred at or beyond the end of recessions, and after a considerable percentage of a bull market’s gains have been recorded.
Source: MARE group