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Today, 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 fell while its growth rate rose to a six-week high.

For the week ending July 13, 2012:

  • WLI rose to 121.9, down from the prior week's reading of 122.9.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth rose to negative 2.3%, up from last week's reading of negative 2.7%.
  • The lowest reading for WLI growth on record was -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.

(click images to enlarge)

Annual WLI growth: A year ago, on July 15, 2011, WLI stood at 128.1 So its growth rate is -4.9% on an annualized basis.

The chart above shows ECRI's reported WLI growth rate, which is derived from a four-week moving average.

ECRI Says We Are in a Recession Now

On July 10, 2012, Lakshman Achuthan, co-founder of the ECRI, told Bloomberg that he believes we are currently in a recession. Yes, ECRI believes its predicted recession has already started. "If you are a frog in a pot of water, when do you realize what is going on?" A video and a summary of Lakshman's comments can be found here.

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 predicting higher prices for SPY in the weeks ahead?

S&P 500 vs. ECRI's WLI

Despite a slowing economy, I like equities for a portion of a portfolio, including SPY and the more diverse Total Stock Market Index exchange traded fund VTI. 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.)

From "Market Timing Quotes":

"There are confident ones; they move from ninety-ten (90:10) in stocks-bonds to five-ninety-five (5:95) in stocks-bonds. That implies a degree of self-confidence bordering on hubris and self-deception. Over the decades, when both groups...have equal limited ability to "time," the cautious chaps who alternate between sixty-five-thirty-five in stocks-bonds and sixty-forty are likely to end up with a superior risk-corrected total return score."
Paul Samuelson, "Journal of Portfolio Management," Fall 1994 .

What Does The Future Hold?

WLI is off last week's eight-week high while its growth rate is at a six-week high. At the time of this writing, the market is up over last week with SPY at $136.58 vs. $135.75 last week, so this will help WLI next week. Is WLI moving toward showing that the recession ECRI says we are in now could be over before GDP data is revised showing it has already begun?

Notes:

  1. Occasionally, the WLI level and growth rate can move in different directions because the latter is derived from a four-week moving average.
  2. 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).
  3. For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
  4. SPY (charts and more info) is the exchange traded fund for the S&P 500 Index.
  5. VTI (charts and more info) is Vanguard's "Total Stock Market" exchange traded fund.
  6. VOO (charts and more info) 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.

Source: ECRI's Weekly Leading Index Growth Rate Rises Again, Still Looks Like We're In A Recession