Markets carried their strong momentum from the second quarter into the third quarter, with the S&P 500, Nasdaq, and Russell 2000 each hitting new highs. Investor sentiment remained optimistic despite soft labor market data and mixed economic signals, and stocks traded higher due to strong corporate earnings, the Federal Reserve’s resumption of rate cuts, and easing trade tensions.
Market Commentary 11/06/24
As we enter the second month of the fourth quarter, the economy is in relatively uncharted territory.
Witness the Leading Economic Index (LEI), which tracks ten data points that tend to change before the overall economy does. Economists monitor the LEI because it includes data that can provide insight into future economic activity, such as unemployment claims, building permits, and manufacturing hours worked. A rising LEI signals improving economic conditions, while a declining LEI suggests worsening conditions.
In early 2020, the LEI declined as the pandemic led to economic shutdowns. Following a brief recession, the index rebounded later in 2020 and into 2021, driven by government stimulus, the reopening of the economy, and low interest rates. The LEI peaked in November 2021, but it has declined steadily over the past few years and now sits at the lowest level since 2016.
Historically, when the LEI declines for several consecutive months, the economy is often entering or is already in a recession. For example, in 1979, the LEI declined for eight consecutive months leading up to the recession. In subsequent recessions, the number of consecutive monthly declines was three months ahead of the 1981 recession, four in 1990 and six in 2001. The longest streak of declines before a recession started was ten months in 2007. The latest data shows the LEI has declined for 30 consecutive months, which surpasses all prior levels. This trend is concerning because it is generally associated with recessions.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
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