A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Market Catching Up?

JAN HOPKINS: For more on the markets, we have our weekly Wall Street panel. We're joined by professor Jeremy Siegel of Wharton Business School from Philadelphia, economist Lakshman Achuthan, and our own Amanda Lang, who was at the New York Stock Exchange all week. Welcome to all of you.

Lakshman, I want to ask you first: Is the market kind of catching up with you economists that have been pretty optimistic about the economy all along?

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INST.: Well, I don't know how many economists have been that optimistic, but I think the market is a short-leading indicator of the economy. It has about a two-quarter lead over the coincidence measures. And if you're watching longer-leading indicators, you may have been optimistic a little bit ahead of this market.

HOPKINS: But -- so at this point, the market is kind of acting the way it normally does?

ACHUTHAN: It's a very durable sequence. You see, the longer- leading indicators first, then the shorter-leading indicators like the market, which can give you false signals, and then the coincidence indicators, like employment or production start bringing up the rear. And we're seeing that durable sequence right now.

HOPKINS: Professor Siegel, is that what you see as well? So is this the beginning of better times ahead?

JEREMY SIEGEL, WHARTON BUSINESS SCHOOL: The market is a very forward-looking indicator of what's happening. Late last year, we know it boomed. And look at our first quarter GDP -- it's probably going to be over 6 percent on the revision this next Friday. And then the hesitation, because the economy is slowing down now -- probably around 3 percent growth this quarter, second half of the year, and they're a little uncertain about how fast profits are going to grow in the second half, given that economic growth looks like it's front loaded, when most economists thought last year it was going to be back-loaded on this year.

HOPKINS: So you sound a little skeptical that this is going to stick, basically?

SIEGEL: I would love to say it was a low; I'm not really convinced. Some of the indicators that I look at are sentiment indicators, did not turn as negative as I would like in last week when it hit the low. But certainly, I think that it's -- the second half of the year is going to be OK. I still think there may be a little bit more to have to wring out of the market in the first half.

HOPKINS: Amanda, you were at the New York Stock Exchange all week. And one of the things that was leading this market was technology and chips. But we've had false signals from this sector of the economy before. So what are you hearing?

AMANDA LANG, CNN FINANCIAL NEWS CORRESPONDENT: Well, one of the things that's negative about that, of course, we saw a move out of the defensives this week. Health care, for instance, down; chips were up. The problem with that is there's a lot of resistance on those big-cap Nasdaq names, you know, the Microsofts of the world. There's only so far they can go before they are going to see pressure.

I asked a trader today, why did the market sell off? We got the consumer sentiment number, bit shoot-up, and then it sagged. And he said, "apathy." There were no buyers. It's a classic. But he said, "it's like the volume fell off, everybody said, we don't want it."

HOPKINS: Let's go back to you, professor Siegel. If investors are buying at this point, what should they expect to get in terms of returns from their stock market investments going forward?

SIEGEL: I think returns are going to be certainly much more modest than they have been. I'm looking to about 5 percent to 7 percent after inflation as the next five-year return. And I don't think this year is going to be very much different.

I think the biggest threat right now that I see to the market is interest rates. And we did see a movement up today in interest rates. And if they continue to move upward, that's going to stall the market even if we get some growth in earnings.

HOPKINS: So let's go back to Lakshman on interest rates. You're the economist, what's your prediction?

ACHUTHAN: Well, to the extent that interest rates are being pushed around by inflation expectations, the future inflation gauge is at a 26-year low; it's just bouncing off of that. So the inflation -- the threat of an inflation upturn in the foreseeable future, which is the next few quarters -- you can't really see much further than that -- is not there. It's just not there.

So for now, I think there's not much of an inflation threat, in part because we are having this relatively sub-par recovery. It's not as strong as some past recoveries we've had.

HOPKINS: Lakshman Achuthan, professor Jeremy Siegel and Amanda Lang, thank you all.