The Conference Board’s leading economic indicators are an aggregation of ten economic data points that have a propensity to predict future levels of economic activity. These data points cover a range of categories such as employment, orders of products for future delivery, home construction, equity markets, credit conditions and consumer sentiment. While these data weakened earlier this year, we are now seeing signs that perhaps the worst is behind us.
After the Federal Reserve began hiking interest rates in March of this year, we saw continued resilience in the LEIs through the May reports. In May, the Fed increased the pace of their rate hikes from 0.25% to 0.50% and signaled future hikes could be necessary. The rapid change in tone from the Fed, along with an energy shock from the Russian invasion of Ukraine, seemed to impact the LEIs and we saw the trend weaken considerably into June. Among the notable changes were decreases in orders for future goods and a corresponding drop in the number of manufacturing hours worked. And as interest rates rose, the cost of building a new home rose substantially and the number of building permit applications across the economy dried up between May and July.
The one constant over the last seven months has been consumer expectations for business conditions. The consumer has been expecting an economic slowdown consistently since May and has not wavered from that view. Thus far, those expectations have not materialized but many continue to believe that a recession will start sometime in 2023. And if the consumer is concerned about a recession, they are not likely to spend money freely.
After a weak summer and early fall, we started to see the first signs of improvement in the indicators starting in October when consumer goods orders, credit conditions, and equity markets all improved. Most observers would not take these three data series to suggest the risk of a recession is off the table, but it is a promising development and possibly signals that any slowdown may be relatively moderate.
If indeed we do see a slowdown, and if that slowdown is more of a “garden variety recession” rather than something more adverse, it is possible that markets have largely priced in that outcome with the selloffs seen earlier in 2022. The average drawdown in bear markets without a recession is 25.2% and the average duration of those bear markets is 212 Days. At the lows in October, the S&P 500 had lost 25.4%and that occurred over a span of 283 days.
Admittedly, the LEIs do not suggest a period of robust economic growth is ahead and we believe the markets have largely adjusted to that reality. However, the LEIs also don’t seem to be pointing to an imminent recession and give us some hope that perhaps there is reason for hope on the horizon.
Back to that comment from the wise person that we started with…not only are the markets and the economy not one in the same, but we know the stock market tends to lead the economic data. History suggests that the lead could be as much as four months. So, if you’re thinking about waiting for the economic data to tell you the worst is behind us, don’t expect the markets to wait around for your investment dollars. Stocks will likely be much higher before you have confirmation of improvement in the economy.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or email@example.com.
Gregory S. Hansen
Managing Director of Trust Investments
Connor R. O’Brien
Trust Investment Officer
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.