The latest round of OECD Composite Leading Indicators was just released, and given how useful these indicators can be in shedding light on the state of the economic cycle (and market cycle) it’s worth taking a look at the trends within the data. Indeed, the January round showed a further down tick in the diffusion index across the 36 countries that OECD calculates these indicators for. In the past this sort of pattern has been a signal of a turning point.
While I have been optimistic on the global economic outlook (on the basis of still supportive monetary policy, rising property prices in the major economies, solid manufacturing and consumer confidence, improving corporate earnings, and accelerating global trade growth), it is worth keeping track of indicators like this for an unbiased guide on potential turning points in the cycle. As I note below, it could well be a more benign type of signal e.g. a mid-expansion slowdown such as that which occurred in 2005, but with equity market valuations increasingly expensive, and the tides turning in global monetary policy, it’s not something to completely dismiss either.
The key takeaways for investors are: