The stock mar­ket is no crys­tal ball into the econ­omy’s out­look

The Pak Banker - - OPINION - Al­lan Sloan

ONE of the great Wall Street par­lor games is try­ing to di­vine what the stock mar­ket is telling us about the fu­ture of the econ­omy. That's es­pe­cially true in a mar­ket like this one, which is down sharply for the year, the oc­ca­sional daily uptick not­with­stand­ing. Af­ter all, the think­ing goes, if to­day's stock prices re­flect what in­vestors are will­ing to pay to­day for a stream of fu­ture earn­ings, there's a macro-eco­nomic mes­sage lurk­ing in there, right? Al­lan Sloan is a colum­nist for The Wash­ing­ton Post. He is a seven-time win­ner of the Loeb Award, busi­ness jour­nal­ism's high­est honor. View Ar­chive Prob­a­bly not. No, I'm not go­ing to use the old line about fall­ing stock mar­kets hav­ing pre­dicted 11 of the past five re­ces­sions. In­stead, I'll show you how lit­tle weight is ac­corded to stock prices by se­ri­ous econ­o­mists whose job is to es­ti­mate the fu­ture course of the econ­omy. I'm talk­ing about the Con­fer­ence Board Lead­ing Eco­nomic In­dex, of­ten known by its for­mer name, the in­dex of lead­ing eco­nomic in­di­ca­tors. The Stan­dard & Poor's 500-stock in­dex is, in fact, one of the 10 fac­tors that Con­fer­ence Board eco­nomic techies use to con­struct the Lead­ing Eco­nomic In­dex, which we'll call LEI from here on. But the S&P's in­flu­ence on the LEI is re­mark­ably light.

Month-to-month changes in the S&P ac­count for only 3.97?per­cent of the change in the 10-fac­tor LEI. By con­trast, changes of av­er­age weekly hours of man­u­fac­tur­ing work­ers ac­count for 27.41?per­cent of the change in the in­dex. And av­er­age con­sumer ex­pec­ta­tions for busi­ness con­di­tions tal­lies 14.59 per­cent. The S&P ranks eighth of the 10 fac­tors, ahead of only two other fac­tors, both of which are fre­quently treated like some sort of eco­nomic di­vin­ing rod: av­er­age weekly ini­tial claims for un­em­ploy­ment in­sur­ance (3.29 per­cent in the LEI) and build­ing per­mits for new pri­vate hous­ing starts (3.10 per­cent). How can pop­u­lar news-mak­ing in­di­ca­tors such as the S&P, un­em­ploy­ment claims and hous­ing starts rank so low on the in­dex, with a com­bined weight less than the spread be­tween fed­eral funds and 10-year Trea­sury se­cu­ri­ties (11.15 per­cent)? "The LEI is an ob­jec­tive and re­li­able tool for fore­cast­ing the econ­omy," Ata­man Ozy­ildirim, the Con­fer­ence Board's di­rec­tor of busi­ness cy­cles and growth re­search, told me. Stock prices, he said, "are a very im­por­tant in­di­ca­tor, but they're very noisy" and of­ten re­flect herd be­hav­ior and mo­men­tum, as op­posed to ra­tio­nal as­sess­ments by in­vestors look­ing at pro­jected fu­ture earn­ings and as­set prices.

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