On Friday, December 7, 2012, the Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group, released its latest readings for its proprietary Weekly Leading Index (WLI). In the latest release, ECRI's WLI rose for the third straight week.
ECRI's website continues to say we are in a recession, "Indicators used to determine official U.S. recession dates have been falling since mid-year."
For the week ending November 30, 2012:
- WLI rose to 126.8, up from the prior week's reading of 126.2.
- The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
- WLI growth rose to positive 3.5%, up from last week's reading of positive 3.4%.
- The lowest reading for WLI growth on record was negative 29.9% on December 5, 2008. It turned higher months before the stock market bottomed on March 6, 2009, at 666.79.
- Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
Annual WLI growth: Based on a simple, year-over-year annualized basis, annual WLI growth is 3.5%.
The next chart below shows ECRI's reported WLI growth rate, which is derived from a four-week moving average.
Chart 3 Showing SPY Adjusted for Reinvested Dividends.
At the current price of $142.41, SPY is above past bull market highs after accounting for reinvested dividends.
WLI peaked at 127.6 for the week ending October 5, 2012. It is no surprise that SPY (adjusted for dividends) was $147.32 on October 5, and today it is 3.3% lower.
Does SPY Lead WLI or Does WLI Lead SPY?
Since ECRI releases WLI numbers for the prior week, and the stock market is known in real time, you can sometimes get a clue for next week's WLI from the weekly change in the S&P 500 or its exchange-traded fund. But this is not always the case. Specifically, in the lead up to the last two recessions, the WLI turned down months before the stock market did.
Is WLI moving up predicting higher prices for SPY in the weeks ahead?
Over the next 10 years, I expect the S&P 500 will keep up with inflation and the dividend it pays should grow with or even exceed inflation. An added benefit to owning equities is that the dividends and capital gains currently get favorable tax treatment. Finally, Treasury rates are artificially low (see Current U.S. Treasury Rates at a Glance) giving all bond funds significant interest rate risk.
I was asked in my Facebook group, "Investing for the Long Term," why I own SPY: "I'm confused; if the ECRI is projecting a recession, why are you long SPY? Is it a market timing strategy?" My answer was:
I don't believe in 'all or nothing' market timing. I explain it more in my newsletter, but I'll adjust my allocation to stocks based on many things including ECRI's outlook. My last two moves for SPY was to sell SOME shares earlier this year when higher and buy them back on June 4, 2012 at $127.50 using 'Auto Buy and Sell targets' in my monthly newsletter. Hope that helps. (Seeking Alpha requires its writers to disclose if we hold a position. Thus, I would report I was long SPY even if SPY was only 1% of the portfolio with the other 99% in cash.)
In the comments section of my article, "GDP Rises To 2% And ECRI WLI Growth Positive, But ECRI Still With Recession Call," ECRI's Chief Operating Officer, Lakshman Achuthan, posted more information about why it has stayed with the recession call:
Yes, U.S. GDP is still rising, [b]ut that doesn't mean we've dodged a new recession. Sound surprising? What most people don't understand is that recessions often begin when gross domestic product is still showing positive growth.
On Thursday Dec. 6, 2012, Lakshman Achuthan, ECRI's cofounder and managing director, discussed with Larry Kudlow the November 29, 2012, "The Tell-Tale Chart" that shows recessionary trajectories for three of four coincident economic indicators.
Here is the chart and link to the video
After the interview, Lakshman Achuthan and I exchanged comments about it on Facebook. Here is a summary:
Kirk: Good interview. I liked the data that stock market went up in 20% of last 15 recessions (three.) Do you have any data or graphics to show that? I've tried to make this point in my articles but most don't get it... they think predicting a recession means predicting negative stock market... sort of like saying the sum of leading indicators predicts leading indicators... nonsense if you understand how it works but I can see why some get confused.
Lakshman: In three of last 15 recessions there was no bear market, 1980, 1945 & 1926-27.
Lakshman: '80 recession was really short, '45 was end of WWII and '26-'27 was Roaring Twenties.
Kirk: Yeah, I made a lot of money in 1980 … My stocks are indicating that this could be another short one... they could be wrong but the ones that lead out of the last bear bottom are starting to roar.
Lakshman: Could be but we need to see non-market related leading indicators join in too.
Kirk: this chart of Gold I posted could give a confirmation of one of the indicators turning (Note, I cleaned up the chart and reposted it on my web site on 12/7/12)
Given that deficit spending is adding significantly to GDP, see my Seeking Alpha article "U.S. Borrowed 39¢ Of Every Dollar Spent In October 2012," I won't hold it against ECRI if we do not get an "official recession" using the common but wrong definition of "two quarters of negative GDP."
In its "The Tell-Tale Chart" article, ECRI wrote,
Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators - the broad measures of production, income, employment and sales - saw their high points in July (vertical red line in chart), with only employment still rising.
So, what does this recession mean for people? The bottom line is that production, income and sales will keep trending down for now, and employment too is likely to turn down.
What Does The Future Hold?
The S&P 500 was up 0.1% for the week with SPY up 0.2% at $142.41 so the market will give a small help to WLI moving higher next week. It is very possible that SPY and several of the stocks in my newsletter explore portfolio that lead out of recessions have bottomed and are pointing to an economic recovery even before most economists agree with ECRI that we are currently in a recession. On the flip-side, if we fall off the fiscal cliff and enter a deep recession next year, this could be the last opportunity to get out of SPY or take profits at levels above the last bull market high. What do you think?
- Occasionally, the WLI level and growth rate can move in different directions because the latter is derived from a four-week moving average.
- ECRI uses the WLI level and WLI growth rate to help predict turns in the business cycle and growth rate cycle, respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative 10, but no recessions resulted (although there were clear growth slowdowns).
- For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
- SPY is the exchange traded fund for the S&P 500 Index.
- VTI is Vanguard's "Total Stock Market" exchange traded fund.
- VOO is Vanguard's new exchange traded fund that tracks the S&P 500 Index. It is a lower cost alternative to SPY. I own and write about SPY, as I have many years of data for it, but VOO could do slightly better than SPY over time because it has a lower expense ratio.