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Follow the Leaders

June 2014

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Recently, the government revised down their estimate of a key gauge of economic activity for the first quarter. Gross Domestic Product (GDP) is now estimated to have contracted not by -1% as previously reported, but by nearly -3% in the year’s opening months.

With the rule of thumb for recession being two consecutive quarters of contracting GDP, is the risk of recession growing? And if a recession is unfolding aren’t both the uptrend in corporate earnings and the stock market at material risk?

While economists debate the reason for the measured contraction in the first quarter—severe winter weather, a “late” Easter, statistical issues gauging healthcare spending with the advent of Obamacare, we suggest investors will be much better served focusing on real-time, forward looking economic indicators.

A short while ago, we posted an article Tea Leaves Suggest No Recession Ahead that looked at key leading indicators. As the title of that article suggests, the probability of a recession is extremely low. Leading indicators of economic activity strongly imply that the underpinnings of both the economic expansion and corporate earnings look solid.

Cartoon: U.S. Economic Data Revisions

Of course, the stock market can always suffer a short term “correction”. But with the solid underpinnings, stock price corrections should prove to be transitory interruptions in an ongoing bull market.

Follow the leaders…as in economic leading indicators, and don’t succumb to scary headlines about rear-view mirror statistical noise.

We remain focused on understanding the current trends in fundamentals because it gives us the best probability for investment success.