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.
