The leading indicator of the US stock market, is a share?

Someone has drawn this graph to show where the world’s major economies are in the current economic cycle, divided into four phases: recession, recovery, boom and overheating.

One thing you should pay attention to is that the Chinese economy is once again in a cycle that is far ahead of other economies.

This is certainly not the first time, but has been the norm for nearly 20 years.

Generally, people regard the GDP growth rate as an economic indicator, which reflects the social and economic conditions simultaneously. If there is an indicator that can know in advance how the GDP growth rate will change, it is the economic leading indicator.

Around the world, the six-month Composite Leading Indicator (CLI) created by the Organization for Economic Co-operation and Development is the most widely used — as its name suggests, the OECD puts the CLI about half a year ahead of GDP. A leading test and causality test have been conducted on the relationship between CLI and US GDP. The results show that CLI growth significantly leads GDP growth under 99% confidences.

In the article “China’s Economy, Freezing Point,” I analyzed:

According to a 4-6 month lead judgment, China’s CLI bottomed in January 2022, which means a high probability that China’s GDP growth data will bottom out in the second quarter, and various financial financing data dropped to the freezing point in April, it is showing such signs of bottoming.

China’s economy is not only significantly ahead of the US, but also ahead of the euro zone, Japan, the UK and other major economies in the world. This is because China is the world’s largest producer, and the production end can first reflect the weakening of the economy. By contrast, the consumption-oriented countries in Europe, the US and Japan are lagging behind in responding to economic fluctuations.

On the other hand, corporate earnings are closely tied to the state of the economy, both in A the U.S., hence the notion that the stock market is a barometer of the economy.

Looking at US stocks over the last quarter century, it is clear that the S&P 500 has moved in tandem with the CLI index to a large extent – of course, with monetary inflation, the S&P has shown a gradual upward trend, while the CLI has stayed within a range.

Looking at the relationship between our CSI 300 and CLI over the past 17 years, we can also clearly see the trend of synchronous operation of the two — and the most interesting thing is that I plotted the CSI 300 and the S&P 500 on the same chart, and we suddenly found that in 2007, 2015, 2018, 2020 and 2022, In each round of stock market ups and downs, our big A shares often accurately ahead of the US stock market.

The difference is only that each round of our big a shares up and down the range of volatility, far more than US stocks.

The stock market of China, the world’s most important manufacturing producer, more reflects the story of the production side, while the stock market of the United States, the world’s largest and most important consumer, more reflects the story of the consumption side. As we all know, the impact of each economic cycle on the production side is far greater than that on the consumption side.

This, perhaps is the A share ahead of the US stock, but every time the volatility is far greater than the US stock reason.

In addition, you may have noticed recently that although there is no good news on the news of the Chinese economy, our big a shares are very resilient in the face of the continuous decline of the US stock market. No matter how the US stock market plunged the day before, you can still get a lift from our big A

In fact, we can also see from the above chart that every time when the US stock market starts to fall, it is basically a confirmation that the bottom of our big a shares has passed.

This is why, in spite of all the opposition, I kept saying “bottom, bottom, bottom” to the big A-shares in the past April and May.

 

Leave a Reply

Your email address will not be published. Required fields are marked *