Personal Wealth Management / Expert Commentary

Ken Fisher Explains the Leading Economic Index

Is the economy headed toward recession? Ken Fisher says there is a reliable way to check: Just look at the Conference Board’s Leading Economic Index (LEI). Between 1959 and 2020, only two US recessions started without being preceded by a falling US LEI trend.

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Ken Fisher: You can see and people ask regularly whether the economy is about to tip over or go down, is this going to be a big problem that’s immediately ahead going to make the economy go south? These questions have been asked forever and there’s a fairly easy answer for all of them, which is that the conference board’s leading economic index will tell you over about the next six months whether the economy’s head up or down.

Ken Fisher: It doesn’t necessarily tell you how much but it basically will point you the direction when you go to the conference board’s website. Just do a simple google search on the conference board, you’ll see leading economics indexes for the United States and a dozen leading countries and EU. They’re constructed uniquely for each country out of indexes that have a long history of when put together telling you the intermediate term direction of the economy.

Ken Fisher: The US LEI is comprised of 10 sub components that are many of them what you might view as relatively obtuse. But they’re things like the ISM manufacturing index, things like the initial unemployment claims, things like the spread between short and long-term interest rates also known as the yield curve, which I’ve talking about near endlessly over the course of my life, and these when put together in the formulaic construction of the index, which is based in how this has worked over a very long time, and these are changed slowly over time. But very very slowly, it’s a very stable index series, they do a very good job of telling you the intermediate term of where the economy is headed.

Ken Fisher: So when you read some pundit telling you that things are about to go south here and now or this that or the other of the reverse at a time when we’ve had recession. The LEI is a really good way to see is that all wet or not, and again just do a simple google search conference board leading economic index LEI. It’ll take you right to it, you can see it in a graphic form and whenever it is high and rising the economy. You can see it’s a wiggle chart whenever it’s high and rising. Don’t get too precise with it, don’t try to micromanage it so to speak. If it’s high and rising the economies can be fine. If it’s falling and low the economies can be bad. If it’s looking like it’s turned and going down, you might have some concerns, but it got a turn to go down for a while, like three months before you actually begin to see signs of impending recession.

Ken Fisher: So ironically, in conclusion ironically of the ten, and this is sort of my punchline for you, the best one of them, the most powerful one of them, is the one that’s right in front of everyone’s eyes all the darn time that people don’t kind of get in their brain. This way is the stock market itself in America. For the US LEI, the S&P 500, it’s one of the ten. It’s been there as long as they’ve created this thing, since the days that the leading economic index was first created by Wesley C Mitchell a long long time ago. When the GDP series was actually almost brand new shortly after Simon Kuznets created it in the 1930s, and from that you get this really simple concept that probably, if the stock market’s doing okay, it’s already telling you the economy is going to be okay.

Ken Fisher: Stocks market’s doing badly, maybe check the LEI to see what’s going on with the rest of the components and how they total together. That’s my story and I’m sticking with it.

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“Investing in Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of Fisher Investments or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.”

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