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Market Insights: Leading indicator shows continued strength

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Market Insights: Leading indicator shows continued strength

One of the ten components of our Milestone Recession Risk™ Composite is the six-month rate of change of the six-month moving average of the Conference Board's Leading Economic Indicator (LEI). The LEI is a widely following indicator of economic activity/growth in the U.S. The variant of this indicator we use for our Composite is a mouthful to say, but it has a solid track record of providing lengthy lead times of recession warnings.  

Another indicator provided by the Conference Board is the Coincident Leading Indicator (CEI). As it states, this is an indicator that moves more in tandem with economic growth as opposed to leading. In the past, the LEI/CEI ratio has also been consistent in peaking well before a U.S. recession. At this point in time, it continues to hit new highs this cycles. Based on history, declines of this ratio have been a necessary, but not sufficient, indicator of recession, so until we see this ratio peak and decline for a significant period of time, recession risk will be extremely low in the short-term and moderately low in the medium-term.

If we see a decline, how long does it typically peak before a recession occurs? In every recession since the 1950s, it has peaked at least ten months prior to recession except for one instance. However, on average, it has peaked 26 months prior to a recession. For those expecting a recession in the next six months, and we have seen a fair share of negative forecasts from some economists, the odds are not in your favor. Unless we see some sort of serious exogenous shock (i.e. negative geopolitical event), this indicator would suggest recession risk is likely to be low for the next couple years. This does not mean we don't see a correction or corrections, but we continue to see longevity for the current bull market.

Source:  Bespoke Investment Group, www.bespokeinvest.com