The ten components of the US LEI are: 1) Average weekly hours for the manufacturing sector; 2) Average weekly initial claims for unemployment insurance; 3) Manufacturers’ new orders for consumer goods and materials; 4) ISM Index of New Orders; 5) Manufacturers’ new orders for non-defense capital goods excluding aircraft; 6) Building permits for new private housing units; 7) S&P 500 index; 8) Leading Credit Index; 9) Interest rate spread, defined as 10-year Treasury bond yield less Federal Funds rate; and 10) Average consumer expectations for business conditions.

The latest readings for the US LEI are a 1.4% increase in July to 104.4 (2016 = 100), following a 3.0% increase in June and a 3.1% increase in May.

The Coincident Economic Index for the US has also been rising for the last three months, which is earlier than usual relative to the LEI. It has no doubt been boosted by government assistance payments and the current situation is anything but usual. The outlook for the global COVID-19 pandemic is still highly uncertain. Hopes for a vaccine grow by the day but how effective and widely available any vaccine will be is still unclear. It is too soon to say we are out of the woods.

Commenting on the latest LEI result, the Conference Board’s Director of Business Cycles & Growth Research said, “The US LEI increased for the third consecutive month in July, albeit at a slower pace than the sharp increases in the previous two months. Despite the recent gains in the LEI, which remain fairly broad-based, the initial post-pandemic recovery appears to be losing steam. The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020.”

Perhaps a clearer picture of what is going on within the share market is provided by the Advance/Decline Line, which is an indicator of market breadth. It is calculated by taking the difference between the number of advancing and declining stocks, and then adding the result to the previous value. It rises when advances exceed declines and falls when declines exceed advances.

It is often a good idea to compare the AD Line with the performance of the actual index. Ideally, the AD Line should confirm an index’s advance or decline with similar movements. The Nasdaq Composite Index and its AD Line can be seen in the chart below. They look quite different.

The market is being quite selective about which stocks are being rewarded and which ones are not. Tech heavyweights with dominant market positions, such as the so called FAANG stocks, have been leading US equity markets higher.

Something similar is happening for the S&P/ASX 200 Index. There has been a pronounced bifurcation of the market between companies than have benefited from the COVID-19 pandemic and those that have been harmed, in some cases severely so.

Beneficiaries include consumer staples and hardware retailers, online retailers, cloud-based technology companies, certain healthcare companies, miners competing with Brazil, and gold producers. Those harmed include airlines and travel companies, office property owners, hospitality and live entertainment companies, employment advertisers, and education services companies dependent on overseas students.