A colleague and I just returned from a week long trip in south Florida visiting some of our clients on both the east and west coast of the state. One notable factor was the very high level of activity everywhere we visited. Restaurants were all packed, road traffic was unbelievably jam packed and the number of semis on the road seemed higher than usual, and usually those trucks do not drive around empty. We visited a new golf course development and the activity was anything but recessionary like. The bottom line is sentiment is highly positive and supports recent economic data releases focused on sentiment and economic indicators.
Several weeks ago the Conference Board released data for the Leading Economic Index through January and the report noted the LEI increased 1.0% in January to 108.1 and follows a .6% increase in December and a .4% increase in November. In other words, the LEI has accelerated over the last three months. The report stated,
"The U.S. LEI accelerated further in January and continues to point to robust economic growth in the first half of 2018. While the recent stock market volatility will not be reflected in the U.S. LEI until next month, consumers' and business' outlook on the economy had been improving for several months and should not be greatly impacted," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. "The leading indicators reflect an economy with widespread strengths coming from financial conditions, manufacturing, residential construction, and labor markets" (emphasis added.)
The first chart below shows a long-term view of the year-over-year change in the Leading Economic Index. Historically, recessionary periods do not occur until the year-over-year percentage change is negative as noted by the yellow circles on the chart. The recent LEI report shows a continued increase in the YOY percentage change of the Index.
Eight of the ten indicators that comprise the index increased in January with the remaining two indicators stable. A shorter time frame for the index and compared to the S&P 500 Index is shown below. A positive trend in the LEI is supportive of an improving economy which tends to lead to higher stock prices.
On Friday, the University of Michigan released the February consumer sentiment report noting the index increased to 99.7 versus 95.7 in January. The report noted that the recent tax cut was the main driver of optimism as personal taxes fell 3.3% in January's data. Also noted in the report,
"The two components in today's report show similar gains: current conditions up 4.4 points to 114.9 which hints at improvement for February consumer spending; and expectations up 3.7 points to 90.0 to underscore the consumer's confidence in the outlooks for jobs and income.
"Readings on inflation expectations, in contrast to inflationary concerns in the financial markets, show no pressure whatsoever, unchanged for a third straight month at 2.7 percent for the 1-year outlook and unchanged for a second straight month at 2.5 percent for the 5-year outlook.
"Consumer confidence remains a standout feature of the economic data, in contrast to actual consumer spending which has been more moderate than robust."
With consumers accounting for about 70% of economic activity, and with much of the sentiment and economic data trending in a positive direction, these factors would suggest a favorable backdrop for equities in the year ahead.
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