The ECRI index might be worth paying more attention to. They recently reported a new high in their leading index and now proclaim that the recovery train has left the station and has “unstoppable” momentum. Well, a new development from ECRI gives some credence to the indicator. A recent article at The Street.com details an investing strategy using the ECRI data:
good leading indices are designed to flag recessions and recoveries before they arrive. Not all leading indices are created equally, but the best can help avert much of the damage that recessions wreak on stock portfolios. The Economic Cycle Research Institute’s leading indices are a case in point.
In mid-September 2000, for the first time in nearly a decade, ECRI warned publicly of a coming recession. (The column is at the right side of the page in the link above.) Then, in early February 2002, it made its economic recovery call. Six years later, in March 2008, ECRI announced that the economy was in recession — a call that remained in force until April 2009, when it predicted a recovery this summer.
Mind you, these weren’t stock-market calls, which ECRI doesn’t make. (Full disclosure: On March 19, 2009, ECRI sent its clients what Grant’s Interest Rate Observer described as a “table-pounding” missive: In Jim Grant’s words, “The implication could not have been clearer that a market rally, when it started, would be no sucker’s affair but the real McCoy.”)But it’s still worth examining what would have happened to the value of a stock portfolio over the course of the past two recessions and recoveries if an investor had simply sold stocks on the day ECRI publicly predicted a recession and bought back stocks on the day ECRI publicly predicted an economic recovery. It’s instructive to compare this to a long-term buy-and-hold strategy for the S&P 500.
The results are compelling. If you had started with $100 in stocks on the day in September 2000 when ECRI publicly warned of recession and followed the standard buy-and-hold strategy, those stocks would have been worth just $72 nine years later, at the end of September 2009.
Alternatively, suppose you had sold all your stocks on that very day in September 2000 and put the cash under your mattress until the day in early 2002 when ECRI announced a recovery, at which point you used all of that money to buy stocks. Then, suppose you once again sold all your stocks on the day in March 2008 that ECRI made its next recession call, and used all of that money to buy stocks on the day ECRI made its 2009 recovery call.
Following that simple buy-low, sell-high strategy, your stocks would be worth $148 at the end of September 2009 — more than double what a buy-and-hold strategy would have given you. You can do the math — over the nine-year period, you would have beaten the buy-and-hold returns by more than 8 percentage points a year, on average, and even more if you had put your cash in money market funds instead of your mattress.
This indicator is certainly worth keeping an eye on and we’ll be sure to keep reporting any changes should they occur.