The index of leading economic indicators rose a slim 0.1% in January, well below the 0.7% rate of increase averaged in the final four months of 2010, but the trend remains positive for economic growth in 2011. Five of the 10 indicators retreated last month – the biggest being building permits, jobless claims and average weekly hours in manufacturing – and five posted increases – the yield curve, supplier deliveries and stock prices making the largest positive contributions. Jobless claims and the average workweek were probably reduced by the harsh winter weather, which suggests that there will be a bounce in these indicators for February. Not every aspect of the Conference Board’s leading indicator series is flashing green, though. The biggest positive contributions continue to be from the financial sector: the steepness of the yield curve and rising stock prices, while “real” economy indicators like orders, building permits and labor market indicators remain fairly stagnant. Still, as the chart below illustrates, the leading indicators point to a better-than-3% rate of U.S. economic growth in 2011, consistent with the Fed’s increased growth targets in the minutes of the latest FOMC meeting, as reported yesterday.
Stock prices barreled ahead again today, with most market averages gaining ground, ranging from Nasdaq’s 0.2% increase to the S&P 600 SmallCaps’ 0.6% advance. Among the major market averages in our purview, only the Nasdaq 100, the 100 largest capitalization stocks on Nasdaq, failed to improve on yesterday’s high for this cycle. Today’s leaders tended to be in the energy and materials sectors; financials were the only sector to advance. At the same time, Treasury bond prices rallied for a third day this week, with the 10-year T-note yield dipping to 3.58%. Consumer prices were reported to have climbed 0.4%, more than the 0.3% expected on the Street, and the core CPI was up 0.2% in January as against 0.1% expected. As the chart shows, there has been a quickening of the inflation rate – virtually every way one measures it – over the past few months. Then again, coming off 50-year low readings for inflation, should we have expected otherwise?
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, has continued early in 2011, extending the S&P 500’s total return to more than 100% since the market bottomed in March 2009. In reaction to the outbreak of protest and violence in Egypt, following on the same trends in Tunisia, stock market volatility, as measured by VIX, climbed back briefly above 20%, but it has since fallen back into the “risk-on” zone as investors wait to see how Egypt’s turn toward democracy and free markets develops. For the moment, corporate earnings prospects remain positive, and if Egypt’s transition to democracy is not too ungainly, the general trend of stock prices figures to be up. Keep in mind, though, that market rallies rarely continue in a straight line, particularly not after a near doubling of stock prices over the past two years.
Copyright © 2011 by Wright Investors’ Service, Inc.