(This guest post originally appeared at the author’s blog)
The ECRI has been adamant that the decline in the growth rate of their Weekly Leading Indicator will not result in a double dip (see here for more). They say the year over year growth is simply coming off of record highs as opposed to signaling a significant slow-down. But the slow-down in growth rate in recent weeks could have different implications for equity investors. Recent research from Morgan Stanley found that the decline in leading indicators is one more notch in the case against higher stock prices (see here for the full report).
Based on the study, which goes back over 30 years, the equity markets are down 80% of the time 6 months after a peak in the WLI growth rate. Taking a longer perspective, however, the ECRI is likely correct in their optimistic outlook. 12 months following a peak the equity markets have been generally higher. According to this the bull market might well be intact, but near-term risks remain:
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