A leading indicator is an economic factor that changes before the economy starts to follow a trend. Examples of leading indicators include: production workweek, building permits, unemployment insurance claims, money supply, inventory changes, and stock prices. The Federal Reserve watches all of these in determining the direction of interest rates. Last year we watched as stock market prices increased sharply. This was a harbinger of better economic news for 2014.

While the first quarter of this year was very weak, primarily due to weather conditions around the country, we have seen a big improvement in the economy in the second and third quarters. In September, we watched volatility return to the market as it moved up and down sharply during the month. As of this writing, the S&P 500 is down about 1.2% for the month. This index represents a broad span of large, medium and small stocks. In contrast, the Russell 2000, which is an index of small stocks, is down 5.2%. Many explanations are possible for the change in values, but clearly the stock market is uneasy with world affairs.  Also weighing on the market is the impact of any increase in interest rates by the Federal Reserve. Both of these could have negative impacts on the economy going forward.

Recently, a client told me that they wanted to see the double digit returns they had been seeing lately continue. The stock market does not continuously “give” double-digit returns!  Once again, this is why diversification is so important in preventing reliance on just one asset class.

Ed Mallon

Posted September 30, 2014 at 4:39PM