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Leads vs lags

Sullivan referenced a strong GDP figure as evidence of a “greatest economy” narrative.

On Nov. 29, the Commerce Department reported its latest estimate that real GDP increased at an annual rate of 5.2% in the third quarter of 2023. This figure marked the biggest increase since the fourth quarter of 2021. It's up from the initial estimate of 4.9% made the previous month.

Goodwin maintains a cautious approach when interpreting macroeconomic indicators.

“What you're describing is really a matter of leads and lags,” she told Sullivan.

Leading indicators are predictive economic measures that tend to change before the economy starts to follow a particular pattern and can be used to anticipate movements in the economic environment. Lagging indicators, on the other hand, are metrics that change after the economy as a whole does.

According to Goodwin, the GDP figure has limited predictive power regarding future economic activity.

“The Q3 GDP data doesn't tell us anything about the way employment’s going to evolve in the next couple of months,” she remarked.

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Will stocks pull back?

The S&P 500 has climbed about 19% in 2023, albeit with considerable volatility. Sullivan highlights observations from various experts suggesting that stocks might be overvalued.

Goodwin says that from a tactical perspective, she expects to see weakness in the equity market. However, she also notes that valuations “aren’t a great timing indicator.”

She added: “When we look at timing of market weakness, we're really looking at when do jobless claims start to materially rise, and when do earnings start to fall off. That's when the equity market says, ‘Oh, we're in recession,’ and that's when we see valuation weakness. It's not going to come just because valuations are high right now,” she explained, noting that this shift could be a few months in the future.

If concerns about market weakness and overvalued stocks are weighing on your mind, it might be wise to consider diversifying your investment portfolio beyond the stock market.

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About the Author

Jing Pan

Jing Pan

Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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