Monday, September 13, 2010

Economic Indications Aren't So Bright

There are many indicators which attempt to gauge the health of the economy. They are broadly divided into three categories: leading (e.g. building permits), coincident (e.g. retail sales) and lagging indicators (e.g. employment data). Focusing on a single indicator, or even a single category, does not give the analyst a good enough gauge of the future of the economy. For this reason, many (including value investor Ken Fisher) consider the ratio between the coincident and lagging indicators to be the single best measure of the direction of the economy.

A chart of this index over the last five years is below:

Source: Bloomberg

Back in 1992, Fisher argued that "when this ratio is rising sharply, always be bullish" and "when it is falling, adopt your most bearish posture". Based on those assertions, it would appear that this indicator started to warn of the current recession in late 2006, well before the market recognized that there were any problems. Furthermore, this ratio started to tick up in early 2009, which was exactly the right time to buy stocks.

Unfortunately, the ratio appears to be on a downward slope once again, which isn't a good sign for the economy. At the same time, however, the downward slope is not steep, perhaps resulting in the "unusual uncertainty" language economists have been using to describe the near-term future.

Investors interested in determining the strength of the economy in the short-term should keep an eye on this ratio, and can do so here.


Anonymous said...

Awesome link. thanks

In his latest article for Forbes, Fisher believes we are early in the next bull.

In responding about a global double dip, he writes "Why do so many fear something that has pretty much never happened? Because we always do that early in a big bull market after a huge bear market. At some later point false fears are seen as that. At that point the rebound will resume."

For the thousands of us that are forced to invest in employer selected mutual funds within our 401ks our only option is to stay in the market because we don't have the luxury of selecting individual securities and timing the market is a sure way to not beat the market.

For other investment accounts, this is good to know.

trevor said...

wow, thanks for the link, very interesting!