Why Rising Stock Markets Improve the US Economy’s Outlook
Do new market highs signal economic expansion?
Expectations for future growth are usually reflected in stock prices. Investors purchase stocks to benefit from the future growth of the companies in which they invest. The Conference Board uses the S&P 500 Index (SPY) as one of its constituents in its construction of the Leading Economic Index (or LEI), as the S&P 500 contains the 500 largest stocks in the United States.
The S&P 500 Index has been having a bull run since the US elections as hopes for fiscal and tax reforms have improved investors’ sentiments. Corporate earnings have also been improving in the last few quarters, adding to the positive outlook for the US economy.
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S&P 500’s performance
The S&P 500 has had only four negative monthly closes since March 2016 and only one negative close since the US elections in November 2016. US indexes (QQQ) continue to see new highs as investor optimism remains elevated. With the earnings season proving to be impressive, we can expect the index to break the 2,500 level in July alone.
The Conference Board Leading Economic Index (or LEI) has a weight of 0.04 for the S&P 500 Index, and the index’s performance has a net contribution of 0.06, or 6%, to the LEI’s growth.
ETFs tracking the S&P 500
The first three ETFs mirror the performance of the index and have returned 11.6% so far this year. The outlook remains positive for the US economy in the near term, with a risk event being the failure of the Trump administration to deliver on tax and fiscal reforms.