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Did the S&P 500 Rebound Help the Leading Economic Index?

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The S&P 500 Index rebounded in May

The S&P 500 Index (SPY) rebounded in May, thanks to a stellar earnings season and a de-escalation of trade tensions between the United States and China. The S&P 500 Index ended May with gains of ~2.2% after declining for three consecutive months since January.

The situation surrounding trade tariffs has deteriorated again in the last few weeks, leading to increased anxiety among global investors. The S&P 500 Index is still posting positive returns so far in June and remains in positive territory for the year. However, escalating trade tensions could lead to some damage to the S&P 500 Index in the months ahead.

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The S&P 500’s performance and its impact on the LEI

The Conference Board uses the performance of the S&P 500 Index as one of the constituents of the LEI (Leading Economic Index). Although there could be some debate on the relevance of the index’s performance as a leading indicator, the inclusion of the S&P 500 Index’s performance in the LEI is purely based on econometric evidence.

The financial model used to construct the LEI only gives a weight of ~4.0% to the performance of the S&P 500 Index (UPRO). In May, the performance of the S&P 500 Index had a net impact of 7.0% on the LEI reading.

ETFs tracking the S&P 500 Index

The SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the Vanguard S&P 500 ETF (VOO) are among the prominent ETFs tracking the performance of the S&P 500 Index. Thanks to the robust earnings season, these funds and the index have rebounded.

With the reignition of trade tensions, we can expect an increase in stock market volatility (VXX), which could derail the recovery of these indexes. Although the economy is on a positive track, the performance of the S&P 500 Index is expected to act as a forward indicator for the economy.

In the next part of this series, we’ll analyze the decline in credit conditions in the United States.

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