On Friday, December 28, 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 to a 72-week high.
ECRI's website continues to say we are in a recession. A December 22, summary says, "While some have argued that the weakness in the job market and the overall economy can be countered with central bank intervention… all the Fed's helicopters and all the Fed's men can put the economy back together again."
For the week ending December 21, 2012:
- WLI rose to 128.3, up from the prior week's reading of 127.2.
- The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
- WLI growth rose to positive 5.4%, up from last week's reading of positive 4.6%.
- The lowest reading for WLI growth on record was negative 29.9% on Dec. 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 6.2%.
The next chart below shows ECRI's reported WLI growth rate, which is derived from a four-week moving average.
If ECRI is correct that we are currently in a recession, is this period one of the 20% of recessions that come without a bear market in stocks?
ECRI's managing director, Lakshman Achuthan said "In three of last 15 recessions there was no bear market, 1980, 1945 and 1926-27. (The) '80 recession was really short, '45 was end of WWII and '26-'27 was Roaring Twenties."
Chart 3 Showing SPY Adjusted for Reinvested Dividends.
At the current price of $140.86, SPY is above the 2000 and 2007 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 $145.11 on October 5, and today it is 2.9% 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, SPY. 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?
(Note, I would plot SPY vs. WLI, but I don't have the data in my spreadsheet going back as far since I only started trading SPY in early 2007.)
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 its 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.
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." And "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.
I should note that on December 20, the government revised Q3-2012 GDP higher from 2.7% in November to 3.1%. It will take a very large negative revision next year to show an official recession began in July as ECRI claims.
Deficit spending is adding significantly to GDP. (See my Seeking Alpha article "SPY Soars As U.S. Borrowed 51.6¢ Of Every Dollar Spent In November 2012.") ECRI is now very clear that it believes no amount of Fed accommodation will prevent a recession.
What Does The Future Hold?
The S&P 500 is down 1.0% for the week with SPY at $140.82 so the market will work against 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.
Disclosure: I am long SPY and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts.
Disclosure: I am long SPY.