The event of the week was the (almost) new high in the New Economy Index (NEI), which is now back to its previous all-time high of 103.80. This was the level the index peaked out at on January 25 and hasn’t been revisited until now.
The recovery in the NEI after a 5-month period of consolidation is telling the story of continued economic strength in the U.S. retail economy. The intermediate-term uptrend for the U.S. economy thus remains intact after the index threatened to break the trend some weeks ago. NEI hasn’t given a confirmed economic “sell” signal in over three years.
Consumer optimism is most conspicuously reflected in the trend for auto sales, which has reached a multi-year high this year. Sales of cars, light trucks and commercial vehicles are moving at a torrid pace this summer, which can be attributed to the economic and financial market momentum from late 2012/early 2013. Rising interest rates – or the fear of higher rates down the line – are also a likely factor in spurring all kinds of big ticket purchases, from cars to houses.
The performance of the New Economy Index in the last few years raises a question: can the NEI be considered as a leading indicator for the stock market? There have been some notable instances of the NEI leading the stock market, both to the upside and the downside, in recent years. I don’t believe a correlation can be established between NEI and the market, however, as several more years of performance history are needed (the index only stretches back to 2007). Nevertheless, since NEI is comprised of the leading consumer/retail sector stocks, a breakout to a new high in NEI this week would carry bullish implications for the broad market.