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What do the “Indicators” Indicate

June 05, 2020
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We are witnessing America reopen as individual states cautiously relax their COVID-19 restrictions, yet economically we are still suffering.

Socially, Americans are supportive of peaceful protests resulting from a grave injustice, yet riotous and destructive acts stemming from what starts as a non-violent exercise of free speech only would seem only to, economically-speaking, push back a recovery even further.

Yet in the midst of these economic and societal tribulations you may have wondered, “how and why has the stock market been doing so well, since the beginning of April?" It’s a great question that has been asked during previous bear markets, when stocks began to suddenly spring forward.

To find answers let’s briefly review what are called Economic Indicators. Perhaps you have an old textbook from your Econ 101 class and if so, dust it off and turn to the chapter entitled “Leading, Lagging and Coincidental Indicators.”

Leading Indicators are factors that are used to anticipate what may happen 6+ months into the future. Many view the stock market as the foremost leading indicator of the direction of the economy. Thus stock prices that seem to have bottomed out and begin to consistently rise in the near-term often point to a much stronger economy coming in the not too distant future.

Lagging Indicators provide insight into past economic data. They may confirm recent trends but they are not very good at predicting new ones. The consumer price index is a historically classic example of a lagging indicator. It tells us what inflation was, but does not provide much insight about what it will be going forward.

Coincidental Indicators show the state of the economy at the present moment. For example, gasoline deliveries are currently trending higher, the supply of toilet paper seems to be presently meeting demand and even the airlines at this time are seeing an increase in bookings. These coincidental indicators provide some evidence of present, increasing consumer confidence.

So when you ponder what appears to be a divergence between the behavior of the stock market and the overall economy, remember that generally stocks will rise before the economy does and the reverse is true as well.

At Henry Wealth Management, our job is to help indicate what your future could look like, utilizing conservative planning assumptions, offering solid investment plans and needed insurance protections. Please let us know if you have questions or would like to schedule a meeting, call or a Zoom conference.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.