WE are constantly trying to forecast the economic future like trying to predict rain or sunshine. It is a valid exercise as certain preconditions lead to a result that can then be foretold with reasonable accuracy.
The Conference Board Leading Economic Index (LEI) is an American economic leading indicator intended to forecast future economic activity. It is calculated by the Conference Board, a nongovernment organization, which determines the value of the index from the values of 10 key variables.
It all makes sense, at least on paper. The LEI has a fairly good track record of things done before an economic recession. Part of the problem is that—depending on which group of economic experts you ask—there are five, 10, 16 or 20 different variables that should be included when compiling any index of leading economic indicators. Even the Conference Board makes “adjustments” to what is included in the index and the weighing of each of those factors.
Predicting the weather is easier in the short term. And all forecasts —economic or weather—are more or less a guesstimate the longer the time frame for the prediction.
There are all types of “indexes” and we are conditioned to believe that most, if not all, are trying to make a prediction for the future. However, many of these are snapshots of the current situation. For example, the “Terrorism Index” shows that the Philippines is much more dangerous than Thailand. Yet, two weeks ago, Bangkok saw six small bombs exploding, injuring four people. At least the “Global Terrorism Index” is characterized as a snapshot rather than a forecast.
According to the Philippine Statistics Authority, we have a Philippine Leading Economic Indicator System also with 11 factors. It does not seem to have been updated—or at least reported—since 2014. The reason may be that the index was basically flat from third quarter 2010 to first quarter 2014, even as the economic growth moved from 7.5 percent to 3 percent and back to 7 percent.
One variable that is included in all of these indexes is the price changes of the stock market. The reasoning works this way: “Though the stock market is not the most important indicator, it’s the one that most people look to first. Because stock prices are based in part on what companies are expected to earn, the market can indicate the economy’s direction if earnings estimates are accurate.” Further, “a strong market may suggest that earnings estimates are up and therefore the overall economy is preparing to thrive.”
We can immediately see that those statements were written by an economic expert who has no intention of actually “putting the money where the mouth is.” Notice that “stock prices are based in part” and “a strong market may suggest.”
They cannot be blamed for hedging their bets. Just ask a local expert on stock market “catalysts.” They will tell you that the Philippine stock exchange goes up with global, regional, and United States stock markets. Except when it does not, which is about 50 percent of the time.
As much as it would be wonderful to draw a firm correlation between our stock market and future economic growth, it just does not exist. It would even be great to see a correlation between short-term stock price movement and current (or immediate past) economic growth.
What we do see though is that local stock prices can follow the general economic growth trend over a long period. The problem is that you cannot buy or sell based on that trend. From 1999 to 2002, the economy had good growth; the stock market index went from 2,500 to 1,000.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.