Leading Indicators For Long-term Stock Market Investors

Leading Indicators

Leading indicators for the stock market give us a better idea 'ahead of time' where the stock market might be heading. Yardeni Research provides a chart of the main leading indicator indexes (from the Conference Board) which blend a number of the best leading indicators into an index: -

The Index of Leading Economic Indicators (LEI) has been a bad indicator of a recession in the current cycle. It peaked in 2021 and has been falling ever since. The red dotted line is the S&P 500 has ascended to record highs, but, it did drop about 20% in 2022. Unlike the LEI, the Index of Coincident Economic Indicators has been the best leading indicator tracking the SP500 to new all time highs. However, as you can see from the graph above, there is a lag between the LEI turning down and the SP500 doing the same. The divergence you can see between the SP500 and the LEI may be down to the AI mania bubble and liquidity injections by central banks which reversed the 2022 crash. We shall see if this divergence eventually plays out in 2025.

The Conference Board growth rate dipping below -4 or -5 has either been an excellent recession predictor, but even when there was no recession in 2022 there was a bear market in stocks so heading back down after not surfacing above zero could spell headwinds ahead... 

The Conference Board Leading Indicators Index

The "Conference Board Leading Economic Index Annual Percentage Change" US chart below, pulls together a bunch of the best 'leading' indicators to give stronger overall leading indicator for the direction of the economy (and therefore the stock market).

The chart above is for the US, which is very important to follow if you have a standard globally diversified fund as the lions share of stocks will me US stocks. The links below give the same LEI index figures for various countries and regions around the world...

• Global LEI (click the "Country Leading Indicators" link to see a breakdown by country)

• CEO Confidence

• Employment Trends Index

• Global Data Summary (the LEI breakdown by Country region shown on this page is a good snapshot summary for the health of our globally diversified portfolio)

• ISABEL LEADING INDICATORS

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• The Conference Board Global Economic Outlook
  
  

A NEW LEI RECORD SPELLS TROUBLE AHEAD 

Another chart below for the US shows the number of consecutive monthly LEI declines. The grey shaded areas are recessions. In 2023 the chart showed a record number of monthly declines WITHOUT seeing a recession. This is quite extraordinary and likely more of a warning sign that something is about to break rather than a sign of economic strength or resilience...

Every recession in the US has been preceded by multi-month declines in the Conference Board LEI, and that is exactly what  happened in 2023 as you can see on the right hand side of the chart below. What's more, the 'Coincident' indicators (a.k.a the real economy) always overshoots the Leading indicators almost every time giving the impression the economy is fine just before the recession, represented by the grey bars below, hits. 

The LEI indicator signalled a recession in August 2024. Will the signal hold? ...

The Conference Board Leading Indicators Index

The "Conference Board Leading Economic Index Annual Percentage Change" US chart below, pulls together a bunch of the best 'leading' indicators to give stronger overall leading indicator for the direction of the economy (and therefore the stock market).

• See our dedicated Leading Indicators page "Conference Board" section.

• VERDICT as of NOV 2024: SHORT TERM => BULLISH. MEDIUM/LONG TERM => BEARISH

The OECD COMPOSITE LEADING INDICATOR

The OECD COMPOSITE LEADING INDICATOR combines 10 metrics that measure overall economic conditions.

When the yellow line of peaks in the graph below heads down below the 90% line it signals a reversal from an overheated market…. ...

• U.S. Heavy Trucks Sales and Recessions

Before previous recessions, heavy truck sales have peaked and then declined. Are we seeing that now?

Plunging heavy truck sales are another correlation with falling stocks. The Bureau of Economic Analysis released the data for heavyweight truck sales in 2022. It was not good and coincided with declining stock markets.

Heavyweight trucks move a large percentage of the dollar value of freight around. So, when a big-ticket expenditure that moves freight around the country contracts on a year-over-year basis, we should take note because it can foreshadow a slowdown in overall economic growth.

Leading Indicators

Leading indicators for the stock market give us a better idea 'ahead of time' where the stock market might be heading. Hence, leading indicators are tracked quite high up in this list of fundamentals.

Yardeni Research provides a great chart of the main leading indicator indexes which blend a number of the best leading indicators into an index: -

VERDICT as of NOV 2024: SHORT TERM => BULLISH. MEDIUM/LONG TERM => BEARISH 

The Index of Leading Economic Indicators (LEI) has been a bad indicator of a recession in the current cycle. It peaked in 2021 and has been falling ever since. The red dotted line is the S&P 500 has ascended to record highs, but, it did drop about 20% in 2022. Unlike the LEI, the Index of Coincident Economic Indicators has been the best leading indicator tracking the SP500 to new all time highs. However, as you can see from the graph above, there is a lag between the LEI turning down and the SP500 doing the same. The divergence you can see between the SP500 and the LEI may be down to the AI mania bubble and liquidity injections by central banks which reversed the 2022 crash. We shall see if this divergence eventually plays out in 2025.

Capacity Utilization Portrays Demand and Predicts Recession

The chart below of Capacity Utilization and Unemployment reveals the Capacity Utilization measure as a surprisingly good indicator for lack of demand or weakness in the economy leading to a rise in unemployemt and then recession (... shown in the chart by the shaded grey bars)