Navigating Equities After a Financial Crisis
I am very pleased to introduce Lakshman Achuthan to TBP readers.
Lakshman Achuthan is co-founder and managing director of the Economic Cycle Research Institute (ECRI), an independent organization focused on business cycle analysis and forecasting in the tradition established by ECRI’s co-founder, Geoffrey H. Moore. ECRI maintains business cycle chronologies for 20 countries around the world other than the U.S. Lakshman is the managing editor of ECRI’s forecasting publications and regularly participates in a wide range of public economic discussions.
He is a member of Time magazine’s board of economists, the New York City Economic Advisory Panel and serves as trustee on a number of non-profit boards. Lakshman is the co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.
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There is virtually a one-to-one correspondence between stock price cycles and U.S. growth rate cycles, which the growth rates of ECRI’s leading indexes are designed to anticipate. Thus, there should be a historical correspondence among cycles in these leading index growth rates and stock price cycles. Their precise relationship around business cycle recoveries is of particular importance, as it offers clues to the timing of cyclical upturns in stock prices.
We zero in on the historical patterns of the U.S. Long Leading Index (USLLI) and Weekly Leading Index (WLI) growth rates, juxtaposing them against stock prices around individual business cycle recoveries (charts not shown). Stock price upturns are lined up against USLLI growth starting in 1920 and also against WLI growth from 1949.
The historical charts reveal consistent sequential patterns, providing definitive indications about the timing of bull markets that begin during recessions (chart below updated on April 3, 2009).
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ECRI Leading Indicators & Stock Prices
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April 3rd, 2009 at 10:49 am
Isn’t this the bloke who said we weren’t in recession, when we were, you know, in recession?
This isn’t your granddad’s recession, we may see a recovery in energy and materials but that’s all, folks.
April 3rd, 2009 at 10:49 am
could we get some background, further info, on: U.S. Long Leading Index (USLLI) and Weekly Leading Index (WLI)?
April 3rd, 2009 at 11:37 am
I am interested in the topic, but need more explanation to make sense of the chart.
Perhaps the author could give a more detailed explanation of their indicators and the historic correlations through several crises.
So if the correlation is nearly 1:1, and they move together how does that help? Is there a predictable lag (as in leading). Since this comes from the Economic Cycle Research Institute these must be cyclical (duh) and we are back to calling cycle turns. I don’t believe in a perfect leading indicator but I do respect the long term charts of other crises as an analog for this one. Give us a little more. Please.
April 3rd, 2009 at 12:21 pm
I don’t have a lot of confidence given that the DEC 07 data set is repeated on the chart. Also, something just isn’t even right about the chart! It doesn’t even show one bull market start! To quote from the article… “The historical charts reveal consistent sequential patterns, providing definitive indications about the timing of bull markets that begin during recessions (chart below updated on April 3, 2009).”
April 3rd, 2009 at 12:55 pm
this is verbatim a post from the ECRI, which compiles and sells these indices; so this is a tout for ECRI, not information about markets. there are two types of indicators: economic measures, and sentiment measures. i can’t tell, from this post, which is which. if i don’t know exactly how indices were compiled, i ignore them.
April 3rd, 2009 at 7:46 pm
I have to agree with Leftback here…Achuthan has misread his own data in the recent past…I think I’ll just use this as one more (minor) bit of information to process, but with more than a grain of salt..
April 3rd, 2009 at 10:07 pm
Best place to get online info is from our website or google books. Here are links to start:
WLI data – http://www.businesscycle.com/resources/
LLI background – http://books.google.com/books?id=1aiX6yg3vUUC&pg=PA106&dq=beating+the+business+cycle+long+leading+index&client=firefox-a
Note that the LLI was created in the mid 1980s with knowledge of data from 1948, so perfomace since then and before ’48 is out of sample, and the data was not “fitted” in the first place. LLI Data series starts in 1919.
April 3rd, 2009 at 10:12 pm
Our leading indexes are composites of key drivers of the business cycle. Correlations are not part of our process which focuses on the relationship of indicators around inflection points in growth and inflation.
The one-to-one correspondence between growth rate cycle turns and stock prices may be interesting if you can monitor an indicator that has a longer lead over growth rate cycles than stock prices.
ECRI does not suggest that the LLI is a perfect leading indicator, but it does not include stock prices and has a longer lead than stock prices over growth rate cycle turns.
April 3rd, 2009 at 10:17 pm
Please note that the growth rate of the WLI was steady for a while — there was no repeat of data in the chart.
The chart only show sthe current cycle. We’ve made many other charts for every recovery from recession since the 1920s, and the point is that with few exceptions the pattern is reliable. What we’ve shown here is a glimpse of what we show a limited group of our professional clients. As with all info, you should be wary of the source.
April 3rd, 2009 at 10:20 pm
Yes, this is a post that was posted on ECRI’s site. So what?
April 3rd, 2009 at 10:21 pm
When have I/ECRI misread our own data? Please be more specific.
April 3rd, 2009 at 10:26 pm
Look, I’m simply someone who likes what is happening on the Big Picture blog, and I thought that sharing what we’re seeing with our cycle indexes may be of interest to you all. If you can frame your concerns in a cyclical way, then odds are that ECRI’s leading idnexes can help manage the risk of an upcoming turning point. ECRI does not have some sort of business plan to blog in order to get clients. If this is not your thing, fine. But my experience has been that this leading index approach can get the timing of turns much better than anything else out there, and it’s objective.
April 3rd, 2009 at 11:54 pm
I’ve read bits and pieces of Lakshman’s stuff on other websites – its generally pretty solid – I was pretty excited to see his post here on TBP – I hope he becomes a regular contributor
as with any other analyst/economist, read his stuff with a skeptical eye until you get used to his style, biases and track record – I’m already a fan, but obviously it’ll take more than one post for most of the jaundiced readers here to become fans as well…
;-)
ECRI did a good job with the last recession:
http://www.reuters.com/article/marketsNews/idUSN2016212820080320
I wonder if people are confusing ECRI with the NBER:
http://paul.kedrosky.com/archives/2008/12/01/nbers_recession.html
April 3rd, 2009 at 11:58 pm
actually, correcting myself somewhat – I’ve read more of Anirvan Banerji’s stuff than Lakshman’s on the other site I was thinking of – either way, they’re both from ECRI, so its all good
April 4th, 2009 at 10:55 am
ECRI is great, however this post may have been more timely if posted during the period in which stock prices declined despite the upturn in ECRI’s leading indicators.
April 4th, 2009 at 1:50 pm
WOW..
so these guys knew all along that we are coming out of recession.
and of course these folks also knew that the government will be subsidising trillion of dollars in losses of financials….due to which the stock market has become stable.
am i not seeing it right, or their graph is showing that positive things started happening in last quarter (BTW they have mis labeled DEC 08, as DEC 07)
so if things started going positive six months back….why the hell we need trillion dollars in stimulus spending???
or maybe the continued lay offs will lead to positive business cycle??
or maybe these folks will also go quiet, like every other bottom called, if the stock market again falls another 20%….
or maybe their business cycle….rises and falls every 6-8 months…
April 4th, 2009 at 3:38 pm
I feel like there is a couple paragraphs of test left out of that post.
What exactly are we meant to infer? That sometime after your leading indicator turns bottoms, the stock market bottoms? Why can’t you just say that?
I make this about the 148th posting I’ve seen in the last couple weeks where someone kind of, sort of, calls the bottom. Not so definitively that they can be called wrong later if it isn’t the bottom, but just enough that if this IS the bottom, later they can point to it and say, “SEE! I called it!!!”
As for calling the last recession, big deal. 200 economists were making predictions as to when and if there was a recession. 5-10 probably came pretty close. And Bill Miller of Legg Mason beat the S&P 500 12 times, until he didn’t.
April 4th, 2009 at 4:37 pm
several previous posts echo my confusion as to what the index measures or how it should be interpreted. if lakshman can explain then i’d welcome the contribution as market insight. my perusal of http://www.businesscycle.com/resources/ does not reassure. the WLI (released weekly) has had a relatively constant negative value of “growth” at -25% (minus growth in what, one may ask) at a nearly constant “level” (a nearly constant level in … oh, never mind) since january. i can’t reconcile that constancy with economic or financial events (continually worser) or stock market or commodity values (crashy, then better, then worser, then better, then more worser, then better …).
April 5th, 2009 at 10:21 am
jason in charlotte Says:
April 4th, 2009 at 10:55 am
“…this post may have been more timely if posted during the period in which stock prices declined despite the upturn in ECRI’s leading indicators.”
A: To be clear, while we now know the trough in LLI growth was in Nov., we did not know that at the time. Basically, we need to see a pronounced, pervasive and persistent rise in the index relative to past turns before we can say it’s a real cyclical turn. Still, there is value in the information today as argue that there is no bottoming in economic growth ahead, and therefore the stock market recovery is a classic bear-trap.
Bob_in_MA Says:
April 4th, 2009 at 3:38 pm
“I feel like there is a couple paragraphs of test left out of that post.
A: You are correct. The post comes from an excerpt of a report given to ECRI professional clients in January. However, the post includes a chart of the indexes and stock prices in the current cycle that has been updated through April.
What exactly are we meant to infer? That sometime after your leading indicator turns bottoms, the stock market bottoms?
A: Almost right, but the LLI was not designed to forecast the stock market. Specifically, the LLI/WLI are designed to forecast cyclical turning points in economic growth (LLI doesn’t include stock prices, however WLI does). Since the stock market never misses an upturn in economic growth there should be a relationship among the three series, if the is an upturn in growth ahead.
…. As for calling the last recession, big deal. 200 economists were making predictions as to when and if there was a recession. 5-10 probably came pretty close. And Bill Miller of Legg Mason beat the S&P 500 12 times, until he didn’t.”
A: Calling recessions and recoveries right, without false alarms in between, is a big deal. Lots of people use the words, recession, recovery, depression and leading indicators, but as far as I know, ECRI is the only place that pays its way solely by getting the recession/recovery call right.
Quoting The Economist magazine’s special report on recession forecasting: http://www.businesscycle.com/about/testimonials/
“In a survey in March 2001, 95% of American economists said there would not be a recession.”
“ECRI is perhaps the only organisation to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm.”
drollere Says:
April 4th, 2009 at 4:37 pm
“several previous posts echo my confusion as to what the index measures or how it should be interpreted if lakshman can explain then i’d welcome the contribution as market insight.
A: You can read more about the Weekly Leading Index (formerly known as the Business Week leading index) here: http://books.google.com/books?id=vSz99DDF-q8C&pg=PA107&dq=beating+the+business+cycle+weekly+leading+index&client=firefox-a
my perusal of http://www.businesscycle.com/resources/ does not reassure. the WLI (released weekly) has had a relatively constant negative value of “growth” at -25% (minus growth in what, one may ask) at a nearly constant “level” (a nearly constant level in … oh, never mind) since january.”
A: Recognizing a turn in a cyclical series is tough. We’ve tried pretty much everything over the past 60 years (Markov Switching Models, Neural, Networks, etc.) and the Three P’s works as good as any approach, and it’s fairly straightforward: http://books.google.com/books?id=1aiX6yg3vUUC&pg=PA112&dq=beating+the+business+cycle+three+p%27s&client=firefox-a
“i can’t reconcile that constancy with economic or financial events (continually worser) or stock market or commodity values (crashy, then better, then worser, then better, then more worser, then better …).”
A: One thing to keep in mind is that there will be differences among coincident and leading measures, especially around turning points. Take a look at the chart of the Weekly and Coincident Leading Indexes here (scroll down the page) http://www.businesscycle.com/resources/
April 5th, 2009 at 1:45 pm
OK, I guess the vague equivocating means you really aren’t making any call. What you seem to be saying is that when your series show a turn, so will the stock market. But that really doesn’t tell us anything about whether the recent uptick was just another short-term blip on a longer trip down, or was in fact the real bottom. So, I guess my question is, why do I need your graphs to tell me the obvious?
As for calling recessions, here’s a piece from late December 2007, where you decidedly make no recession call, and you also point out that “seven out of 10 citizens now believe we are or will soon be in a recession.”
http://www.forbes.com/2007/12/26/croesus-chronicles-recession-oped-cz_rl_1227croesus.html
…so seven out of ten ordinary Joes made the correct call in late December 2007, but you failed to. Which is why, I guess, you keep pointing the the call of the previous recession.
April 5th, 2009 at 4:11 pm
I’ve tried to answer you in good faith, but it seems you’d previously made your judgment about me/ECRI, will filter your incoming info accordingly, and make spurious assertions by cherry-picking quotes.
You may have missed a blog that documented public statements from ECRI regarding the onset of the current recession:
http://kirklindstrom.blogspot.com/2008/03/ecri-calls-it-recession-of-choice.html
It goes a bit beyond what I was able to through in the Forbes interview that you link to, but that said, everything in the Forbes piece holds up quite well, including the context in which I made the comment about seven out of ten Americans expecting a recession.
If you’re interested in managing the risk of economic or inflation cycle turns in free market economies, I don’t know of any better tool-set than ECRI leading indexes.
April 6th, 2009 at 5:15 pm
lakshman-
The statement below that you make:
Since the stock market never misses an upturn in economic growth there should be a relationship among the three series, if the is an upturn in growth ahead.
Reply:
If this statement is in fact true then the recent move in the market could be all she wrote for a while. What is missing from the graphs and analysis is quantifying the stock market move up once these indicators signal an ‘upturn in economic growth’.
The other thing to note is that the stock market missed the imminent downturn; perhaps because it was rooted in the credit markets but nonetheless it missed it. The fact that economic growth must now come from a source other than credit growth needs to be understood. I see the de-leveraging continuing for quite a while.
April 8th, 2009 at 4:26 pm
Moss,
My reply follows:
“If this statement is in fact true then the recent move in the market could be all she wrote for a while. What is missing from the graph and analysis is quantifying the stock market move up once these indicators signal an ‘upturn in economic growth’.”
A: Those details are in the full report to our members, but the bottom line answer to your question is that a cyclical upturn in stock prices has to last several months, at least.
“The other thing to note is that the stock market missed the imminent downturn; perhaps because it was rooted in the credit markets but nonetheless it missed it. The fact that economic growth must now come from a source other than credit growth needs to be understood. I see the de-leveraging continuing for quite a while.”
A: If you mean that the stock market didn’t foresee last summer that the economy would fall into a deep recession, you are correct. In fact, the consensus among economists and on Wall Street (even in early September) was that the economy had dodged a recession, given that GDP had risen in the first two quarters of 2008. But that’s par for the course – the stock market is often wrong about the economy. Please note, however, that the LLI and WLI weren’t fooled: their growth rates went into negative territory in late 2007, and stayed deep in recession territory not only last spring when stock prices were rallying in anticipation of a revival in economic growth, but also through the summer that followed (before Lehman’s collapse). But it is when stock prices are confirming the message from the LLI and WLI that they are almost always right. Incidentally, the continuation of deleveraging is not antithetical to a cyclical upswing in stock prices.