Valentine’s Day is by far my wife’s most favorite holiday. Why shouldn’t it be? It is the day where love fills the air and embodies awe-inspiring romantic gestures for every hopeless romantic. For individuals like me, the day is, of course, meant to show appreciation, but more so to express my gratitude for putting up with my difficult antics and late-night rants about monetary policy. Sometimes I wonder if my wife is more excited about the holiday because it’s filled with roses and chocolates, or because it’s the day that she doesn’t have to hear me discuss economic theory to anyone willing to listen. Nonetheless, while the day is filled with devouring chocolate covered strawberries while one recites “roses are red, violets are blue”, it is the day that I get to place all of my undivided attention on the woman I love most all in the aim to recertify my affection. But, of course, we are not here to have coffee and talk about the birds and the bees, we are here to talk about investments and financial markets, and a different type of LOVE filling the air!
During our coffee last week, we talked about how there are multiple ways to Slicin’ N’ Dicin’ investment management techniques which ultimately led to many great follow-up conversations. Over coffee today, I would like to add a bit more color to the use of leading economic data and how its current improvement differs in the wake of particular contracting data. So, grab your cup of coffee as we chat about the L.O.V.E. in the air from improving economic data.
For the high-speed espresso drinkers, here is a quick bullet point synopsis:
- Leading Economic Indicators inflect before Coincident and Lagging
- The S&P 500 (stocks) are a component within the Leading Economic Index
- We’ve seen a trough and reflection in Leading Economic Data while Coincident and Lagging data decline
- Liquidity drives economic Output which will drive Value and Earnings growth
One of the focal points we discussed last week was how DCA uses leading economic data to determine the growth rates of the business cycle. As we always say, our process is rooted in the belief that financial markets are acutely sensitive to changes in economic conditions but it is extremely important to discern which type of economic conditions affect financial market behavior as not all economic variables have equal bearing on the performance of financial assets. Last week, we introduced the Conference Board leading economic indicator subset to show our fellow coffee drinkers some of the data we use in our method of analysis. Today, I would like to introduce what is known as Coincident Economic Indicators and Lagging Economic Indicators as these economic reports garner a lot of attention in the financial media. As you may deduce, leading data is a set of measurements aimed to anticipate turns in economic growth whereas coincident data is showcasing what is current happening in the economy, and lagging data is what is reported after the fact. Below is a table showing the subset of data for each category.