On Friday, Oct. 12, 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 62-week high while its growth rate rose to a 72-week high.
With ECRI's WLI and WLI growth rate rising to highs not seen for more than a year, I still like the SPDR S&P 500 Trust (NYSEARCA:SPY), the exchange-traded fund for the S&P 500. I continue to hold my trading position in the SPY.
ECRI Maintaining Its Recession Call
Despite the higher WLI, ECRI's homepage still has a video with text that says, "Nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession -- and we do believe we are in recession." Will the movement of WLI lead it to predict an economic expansion for the months ahead?
Click to enlarge images.
For the week ending Oct. 5, 2012:
- WLI rose to 127.7, 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 5.7%, up from last week's reading of positive 4.6%.
- 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.
Annual WLI Growth
A year prior, for the week ending on Oct. 11, 2011, WLI stood at 119.8. So WLI's growth rate is a positive 6.6% on an annualized basis.
On Friday, Sept. 14, 2012, the SPY made a record all-time intraday high of 147.32 after accounting for reinvested dividends. It is now a month later and the SPY is down about 3%, yet ECRI's WLI has continued higher.
SPY Adjusted for Reinvested Dividends
The chart below shows ECRI's reported WLI growth rate, which is derived from a four-week moving average.
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, the 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 the 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.)
What Does the Future Hold?
The S&P 500 fell 2.2% last week, with the SPY finishing at $142.89. So this will work against WLI moving higher next week.
With ECRI's WLI growth positive and moving higher for 15 consecutive weeks since bottoming at a negative 3.5% on June 22, 2012, will ECRI call for an upturn in the business cycle without its predicted recession occurring?
- 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, you can read its book, Beating the Business Cycle.
- VTI is Vanguard's "Total Stock Market" exchange-traded fund.
- VO is Vanguard's new exchange-traded fund that tracks the S&P 500 Index. It is a lower cost alternative to the SPY. I own and write about the SPY, as I have many years of data for it, but VOO could do slightly better than the 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.