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In my February 2011 article "How to Play Expected Inflation from the TIPS Spread," I wrote I was long SPY, as one way to benefit from expected inflation. "I also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P 500, for both inflation protection and income."

I have been correct to recommend SPY here on Seeking Alpha for the past few years despite ECRI's fears of a recession. This week SPY adjusted for dividends made another new record all-time high. The raw price index for SPY, without dividends and shown in green on my graph, is just below its all-time high. Despite declines in the last two weeks, my chart #3 below shows ECRI's WLI growth remains well above its 2012 highs.

Chart 1 Showing SPY Adjusted for Reinvested Dividends.

(Click to enlarge)

Chart 2

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On Friday, February 22, 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 growth rate fell for the second week in a row.

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."

(Click to enlarge)

For the week ending February 15, 2013:

  1. WLI slipped to 129.1 from the prior week's reading of 129.7.
  2. The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  3. WLI growth also fell to positive 7.6%, down from the prior week's reading of positive 8.4%.
  4. 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.
  5. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.

Chart 3

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Annual WLI growth: Based on a simple, year-over-year annualized basis, annual WLI growth fell this week from 5.2% to 4.9%.

The next chart below shows ECRI's reported WLI growth rate, which is derived from a four-week moving average. Note how Q4 GDP shows a recessionary growth rate of negative 0.1%.

Yesterday (Feb. 21,2013) Wal-Mart Stores, Inc. (WMT) warned that they expected no revenue growth in the current quarter and blamed delays in tax refunds for a slow start to the current quarter.

However, February sales started slower than planned, due in large part, to the delay in income tax refunds. We began seeing increased tax refund check activity late last week in our stores, resulting in a more normalized weekly sales pattern for this time of the year. Due to the slower sales rate in the first few weeks of this year's first quarter, we are forecasting comp sales for the 13-week period from Jan. 26 to Apr. 26, 2013 to be around flat. We continue to monitor economic conditions that can impact our sales, such as rising fuel prices, changes in inflation and the payroll tax increase."

With fuel prices higher across the nation, I could easily see Wal-Mart sales fall. If we have sequestration where government workers salaries and hours are cut, then Wal-Mart (and other stores tied to the marginal consumer) could see sales fall even more. If enough companies see sales decline, we could get a second quarter of negative GDP which would give us the recession ECRI predicted.

Chart 4

(Click to enlarge)

If ECRI is correct that we are currently in a recession, would it be 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 & 1926-27. (The) '80 recession was really short, '45 was end of WWII and '26-'27 was Roaring Twenties."

Does SPY Lead WLI or Does WLI Lead SPY?

At the current price of $151.46, SPY is above the 2000 and 2007 bull market highs after accounting for reinvested dividends. (See chart 1 above)

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 growth moving down predicting lower prices for SPY in the weeks ahead or is it just a speed bump?

Chart 5: S&P 500 vs. ECRI's WLI
(Click to enlarge)

(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 they have stayed with their 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 January 30, the government released their first estimate of Q4-2012 GDP. GDP shrank by 0.1% in Q4. ECRI thought a new recession began in Q3-2012. In their "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. "

Deficit spending is adding significantly to GDP. (See my Seeking Alpha article "SPY Soars As U.S. Borrows 32.2 Cents Of Every Dollar Spent In Fiscal 2013.") ECRI clearly stated that they believed no amount of Fed accommodation will prevent a recession.

What Does The Future Hold?

The S&P 500 is down 0.4% for the week with SPY at $151.56 so the market will help WLI move lower next week. It is very possible that SPY and several of the stocks in my newsletter "Explore Portfolio" that lead out of recessions and bottomed months ago are pointing to an economic recovery even before most economists agree with ECRI that we are currently in a recession. It will be interesting to see if the massive tax increases on the wealthy plus the 2% payroll tax increase on everyone will be enough to cause Q1-2013 to record a second, consecutive quarter of negative GDP growth.

The Jan. 30 revision says GDP grew 3.1% so ECRI might have missed the start of a new recession by months. With the massive tax increases on every consumer due to the payroll tax reverting to 6.2% from 4.2% and looming cuts to defense spending from "sequestration," it is possible Q1-2013 will also show negative GDP growth for a technical definition of a recession. ECRI may prove correct after all.

What do you think?


  1. I trade SPY around a core position in my newsletter's "Explore Portfolio" and with my personal account. For both, I last added shares at $127.50 in June 2012 and I took profits on 1/18/13 at $147.55. With dividends reinvested, my explore portfolio holds 129.565 shares of SPY with a "break-even" price of $105.18. I also have the index fund version of SPY in both my newsletter's "core" portfolios.
  2. Occasionally, the WLI level and growth rate can move in different directions because the latter is derived from a four-week moving average.
  3. 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).
  4. For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
  5. SPY is the exchange traded fund for the S&P 500 Index.
  6. VTI is Vanguard's "Total Stock Market" exchange traded fund.
  7. 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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: SPY Near Record Highs As ECRI's WLI Continues Lower For A Second Week