Stock markets have always been somewhat unreliable as a forecasting tool. And their record has got worse in recent years, as long-term investors have been replaced by high-speed day traders. In turn, this affects the Leading Indicators produced by the OECD, and others, as these rely on stock price movements in their analysis.
A more reliable Leading Indicator is that produced by the US Economic Cycle Research Institute. This has only produced one ‘false’ reading over the past 40 years – following the October 1987 stock market crash. Otherwise, it has a perfect record in forecasting recessions. And as the above chart shows, it fell last week to -5.7%, which has accurately signalled recession ahead of the past 7 US downturns.
Of course, it may be wrong. But it adds to the mounting evidence that the downturn in the West is set to continue, as the boost from stimulus programmes and restocking fades. And as Dave Rosenberg of Gluskin Sieff notes, it did accurately forecast the relapse in 2002 when, as today, the consensus was forecasting 3% GDP growth for H2.