Leading index → US stocks

Common explanation (Knock-on · same direction): Strong economy → company profits → share prices.

This issue: Leading index at 42 (neutral), US stocks at 94 (hot) — at least one is in the neutral range (40⁠–⁠60), so we make no call this issue.

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

Leading index: Now 100.14. US stocks: 84.4% above its 10-year average.

Tests

Does this link hold up?

Common explanationStrong economy → company profits → share pricesSource: Federal Reserve Board, “FOMC Minutes, September 25-26, 2018” (2018). The minutes describe a single period; stock prices are also often part of leading indexes (Taiwan’s National Development Council includes them), so the two may influence each other.
Tested against our dataAgreement between the positions of Leading index and US stocks (3-month lag), measured in the direction of the common explanation: −0.03. Looking at every 5-year period (shifted one year at a time), the two moved in that direction in 34 of 51. In most periods the two moved the way the common explanation says, but their highs and lows do not line up over the whole history, so overall no relationship is visible.Not visible in our data
Periods when it did not holdAcross 51 5-year periods, out of step in 1975⁠–⁠2005 and 2009⁠–⁠2015.

History

The two lines, overlaid

Data: Organisation for Economic Co-operation and Development (OECD), Composite Leading Indicators; Professor Robert J. Shiller, public data. Positions: our calculation.

Leading indexUS stocks

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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