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Leading Economic Indicators Surge, Stocks Break Record High Again

The benchmark index of U.S. leading economic indicators surged 1.2% in October, following an anemic 0.1% increase and 0.4% increase in August and September.

As the impact of the worst hurricane season in decades dissipated, the U.S. Leading Economic Index, calculated by The Conference Board, shot higher in October.

Even at the peak of the last economic expansion, the index of leading indicators did not hit the recent levels, and that was a debt-fueled bubble.

In contrast to the last economic cycle that ended with The Great Recession, this expansion is unfolding as the monthly ratio of a household's fixed expenses versus income has hovered near a record-low for five years. Rarely have consumers ever been better able to meet their monthly fixed expenses! You almost never see this data published in the mainstream financial media, even though it is a publicly available index tracked by the Federal Reserve.

Not prone to hyperbole or statistical inaccuracy, The Conference Board, an association for America's largest companies that has tracked the LEI though business cycles for decades, says growth of the LEI in October, coupled with widespread strength among its 10 subcomponents, suggest "solid growth" in the U.S. economy through the holiday season and new year.

The LEI is hitting highs at a time when real wages have been soaring and the consensus forecast for the U.S. economy is very good.

In early November, The Wall Street Journal surveyed 58 economists and their consensus forecast was for an average growth rate over the next five quarters of 2.5%. Meanwhile, growth in real wages of 1.4% for the 12 months through October is four times that of the last expansion, from 2000 through 2006, and twice the rate of the roaring 1990s expansion!

The Brookings Institute, a non-partisan think tank, crunched wage and inflation numbers dating back to 1981 and here's what they found.

Growth in real wages of 1.4% for the past 12 months is twice the rate of the roaring 1990s expansion!

It's four times the rate of growth of the last expansion, from 2000 through 2006.

Despite uncertainty over tax reform, political turbulence, and a change in leadership at The Federal Reserve, the Standard & Poor's 500 stock index, a key growth component in diversified portfolios, closed at a new all-time record high on Friday at 2602.42.

A 10% or 15% drop could occur at any time on bad news or change in sentiment, and the chance of a bear market decline of 20% or more increases as the eight-and-a-half-year bull market grows older. However, leading indicators point to solid economic growth, real wages soared in recent months, and the forecast for the next five quarters.

The average share price of a stock in the S&P 500 trades at 19.9 times its trailing 12-month earnings and 17.4 times the consensus forecast of Wall Street analysts for 2018 earnings, which is a bit expensive but within stocks' historical valuation range.


This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial advice without consulting a professional about your personal situation.

Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.


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This article was written by a professional financial journalist for The Hogan-Knotts Financial Group and is not intended as legal or investment advice.

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