The Leading Economic Index (LEI) has finally turned positive after a 23-month decline, signaling good news for the stock market. This closely watched recession indicator gained 0.1% month-over-month in February, ending a near two-year downward trend.
Carson Group strategist Barry Gilbert noted that sustained declines in the LEI have historically preceded recessions, but this time around, it seems like a recession may have been avoided as the Federal Reserve works to engineer a soft landing. However, it’s important to consider that the LEI is heavily weighted towards the goods economy, which only makes up about 15% of today’s economy. The strength in economic growth over the past year has largely been driven by the services sector, which has caused the LEI to trend negatively for so long.
Carson Group’s internal Leading Economic Index, which focuses more on the services economy, suggests trend growth for the economy throughout the rest of the year. This aligns with the Fed’s GDPNow forecast of 2.1% growth in the first quarter.
From a stock market perspective, the end of a decline in the LEI typically leads to higher stock prices. Gilbert pointed to previous instances, such as a 22-month decline in 1975 and a 24-month decline in 2009, which were followed by double-digit returns for the stock market over the next year.
On average, the S&P 500 has seen a 15.6% one-year return after the LEI turns positive following a negative streak, with a win ratio of 85.7%. The median one-year return is even higher, at 19.2%.
In conclusion, despite potential bumps along the way, the outlook for stocks for the rest of the year looks solid. Economic headwinds are slowly being removed, and historical data suggests that the stock market could see significant gains in the coming months.
