Tuesday , 12 December 2017


Does the Stock Market Lead the Economy or the Other Way Around?

You might be able to predict the economy from the stock market, but you can’t do it the other way around. [As such,] ignore economists trying to forecast the market because the market knows better what is going to happen with the economy than even the leading indicators. [In fact,] the stock market leads the LEI by about a month. [Let me substantiate my words.] Words: 333

So says Mike Moody (www.systematicrelativestrength.com) in edited excerpts from the original article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)

Moody goes on to say, in part:

I am constantly aggravated by economists on CNBC who discuss their outlook for economic growth and then attach their market forecast. If the economy is good, the market is supposed to be good too. The fact is that things work the other way around. The S&P 500 is one of the leading economic indicators…  In that respect, CXO Advisory has analyzed and compared the data of the two and found that:

  • the correlation between the Leading Economic Index (LEI) and the stock market the following month is fairly high, with a correlation coefficient of 0.39, but that is the case because the LEI is reported with a big lag.
  • the correlation between the LEI and the stock market after the data is actually released drops to 0.10. (With an r-squared of 0.01, there is effectively no predictive power.)
  • the correlation between the LEI and the stock market over a 10-year period [as seen in the graph below] also does not support the assertion that the economy leads the stock market: 

Source: CXO Advisory (click on image to enlarge)

Conclusion

In fact, the research of CXO Advisory concluded not that the LEI forecasts future stock market performance but just the opposite – the stock market leads the LEI by about a month.

* http://systematicrelativestrength.com/2012/02/21/take-the-lead/

Editor’s Note: The above article has been has edited ([ ]), abridged (…) and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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