Stocks Decline Despite Advance in Leading Indicators

Following a downturn in equity markets across the globe, US stocks opened sharply lower on Monday morning. A fifth straight advance in the Leading Economic Indicators had little impact on markets, who are anxious one day before the Federal Reserve holds its two-day monetary policy meeting.

As of 11:00, the S&P 500 is beginning the week down 0.70% to 1061, while the Dow is trading 0.69% lower at 9,752, and the Nasdaq is 0.23% lower at 2,128.

Crude prices slid more than two dollars to below $70 a barrel in New York, while the dollar continued rebound against the major currencies.

The Leading Economic Indicators index is a composite of data from all sectors in the economy, which analysts use to track turning points in the economy. In August, the composite saw its fifth straight monthly gain, giving a wide confirmation that the economy was picking up speed in late summer. But the monthly advance was 0.6%, slightly lower than forecasts were looking for.

“The 4.7-point cumulative increase over that five month stretch is the highest over any comparable span in 26 years,” noted analysts at Nomura Global Economics. In addition, the July score was revised up three-tenths to +0.9%, which pulled the year-to-year gain well into positive territory at +1.9%. 

“The fact that the index is currently in positive territory is an important confirmation that the economy is recovering,” said Joseph LaVorgna and Carl Riccadonna, economists at Deutsche Bank. “Furthermore, the fact that the index is showing a string of solid, consecutive gains reinforces the likelihood of the economy continuing to expand beyond the current quarter.” 

The apparent expansion is precarious, however, as jobs aren’t being created and much of the optimism originates in the volatile stock market, said TD economist Ian Pollick.

“There are still headwinds in the economy that must be faced,” he said. “The labor market represents a large risk, as any slowdown in the pace of improvement may hinder the leading indicators index going forward. The same also holds true with stock prices, should a sell-off occur, we are likely to see a pullback in the level of the index as well.”

No more data is scheduled for the day, but at 1pm the Treasury holds auctions for 3-month and 6-month Bills. With equities out of favor today, the benchmark 10-year yield has shed three basis points to 3.41%.