Investment Perspective Amid Risks Of Fed Tightening, Covid Variants, And European War
Published Friday, February 18, 2022 at: 8:01 PM EST
For the first time in 12 months, the U.S. Index of Leading Economic Indicators (LEI) ticked down, falling by three-tenths of 1% in January, as the Omicron variant, inflation, and supply chain problems cooled the hot economy.
The LEI is a forward-looking index of 10 components, making it a reliable indicator of recessions and the pace of growth in the economy. Apart from one other interruption in early 2021, the LEI has surged higher every month since the economic recovery from the Covid virus began in April 2020.
Initial unemployment insurance claims, consumer sentiment, and a decline in stock prices were the key culprit components to blame for the weaker LEI in January, according to The Conference Board, an association for large companies that maintains the monthly index.
“Despite this month’s decline and a deceleration in the LEI’s six-month growth rate, widespread strengths among the leading indicators still point to continued, albeit slower, economic growth into the spring,” said Ataman Ozyildirim, who heads Conference Board’s economics team.
The Conference Board forecasts U.S. gross domestic product growth for the first quarter of 2022 to slow from the very rapid growth pace of the fourth quarter of 2021. However, the US economy is projected by The Conference Board to expand by a robust 3.5% year-over-year in 2022, much faster than the pre-pandemic growth rate that averaged 2%.
The LEI collapsed months in advance of every recession in modern U.S. history, except for the Covid-19 recession.
The Conference Board Leading Economic Index® (LEI) components:
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers' new orders, consumer goods and materials
- ISM® new orders index
- Manufacturers' new orders, nondefense capital goods excluding. aircraft
- Building permits, new private housing units
- S&P 500 stock price index
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less Federal Funds Rate
- Avg. consumer expectations for business conditions
LEI growth is important in strategically managing wealth because it measures current economic growth, and economic growth drives profit growth at America’s 500 largest publicly-held companies, which drives asset values.
The Standard & Poor’s 500 stock index closed Friday, February 18, 2022, at 4,348.87. The index lost -0.72% from Thursday and was down -1.59% from last Friday’s closing price. The stock index is up +64.11% from the March 23, 2020, bear market low.
The stock market corrected, recently falling 10% from its January 3, 2022, record closing-high. Meanwhile, interest rates are expected to be hiked by the Federal Reserve Bank in March for the first time in several years, a war in Europe is expected to break out any moment, and the pandemic is not over yet.
Despite the risks, the LEI’s January reading and assessment from The Conference Board are reliable data points to focus on, at a seemingly risky time in the world. With a 3.5% U.S. growth rate expected for 2022, the stock market could yet surprise investors by resuming its bull run.
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