LPL: Leading Indicators Signal Potential Bottom
Leading economic indicators are signaling that the pace of economic deterioration may be slowing. As shown in the LPL Chart of the Day, the Conference Board’s Leading Economic Index (LEI), a composite of leading data series, fell 4.4% month over month in April. While this is an undeniably abysmal reading, it is an improvement from the -7.4% in March.
”The monthly LEI change tends to bottom early in a recession, and sometimes even before a recession’s official start,” said LPL Financial Senior Market Strategist Ryan Detrick. “Stocks are forward looking, so if investors feel confident that the economic damage will not accelerate from here, they may be more willing to put capital to work. We think today’s LEI number largely confirms April’s strong moves in the equity markets.”
The performance of the 10 underlying components in the LEI does indicate some disconnect between financial markets and the real economy. The two largest positive contributors to the headline LEI number this month were stock prices and the interest rate spread, which were buoyed by a swift and robust monetary and fiscal stimulus. Meanwhile, data series related to manufacturing, unemployment, and construction hurt the index, a reflection of the damage done to the parts of the economy in which workers are unable to perform their jobs remotely.
As local economies begin to reopen, we look for the industries disproportionately impacted by the COVID-19 virus to begin to rebound. While this will likely be a bumpy process, progress will likely become evident in future LEI releases and confirm that the worst of the economic declines are behind us. We think this should pave the way for further equity gains over a long-term horizon.