LPL Financial Corp., the largest independent broker-dealer in the U.S., released Monday, April 26, the first one-year update on the performance of its Current Conditions Index (CCI). The CCI is designed to provide retail investors and their advisors with real-time insight into what LPL calls the "true underlying health" of the economy.
The indicators of the CCI for the second half of this year are not as pessimistic as the mass of data suggests, but as the Fed spread widens and the effects of government stimulus fade, the CCI will downshift from 'growth' to 'slow growth.'
The index excludes the many indicators that lag or lead the economy. Instead, the weekly tracking tool includes 10 key indicators, frequently updated, that together provide a snapshot of where the economy is at any given moment.
The CCI uses initial claims filed or unemployment benefits, Fed spread, credit spreads, retail sales, shipping traffic, business lending, VIX, money market asset growth, commodity prices, and mortgage applications.
The index then tallies these results and tracks how closely the economy is aligning to areas labeled as strong growth, growth, slow growth, contraction and crisis scenarios.
Jeffrey Kleintop, executive vice president and chief market strategist for LPL, said in a statement, "Too many retail investors and their financial advisors are overly focused on lagging indicators, all of which are too infrequent and volatile to provide actionable insight that delivers results. By this same token, ardent stock market watchers are over-emphasizing something too heavily fueled by the often over-reactive emotions of its participants, as demonstrated by the first quarter 2009 investor panic that temporarily brought the major market indices to historic lows."
Since April 2009, the index has swung from Contraction to Strong Growth. After rebounding from the 2009 low point in early March, the CCI advanced steadily until early August. The CCI renewed the upward move with the biggest increase between the end of October 2009 and April 2010, jumping from 81 to 231.
Geoff Forcella, a CFP with Forcella Wealth Management, an independent wealth management firm with $140 million AUM and is affiliated with LPL Financial, has used the index since then beginning of 2009.
"So many clients were desperately worried about what looked like the meltdown of our economy," Forcella said in an e-mail interview, "and it was incredibly helpful to have an updated CCI at hand every week for use in reassuring them about what all of the emotional 'noise' about the markets and the economy really meant - and just as importantly, what it didn't mean."
Kleintop told Investment Advisor that the CCI is available to LPL's more than 12,000 advisors, and, based on their feedback, is embraced by a very broad number of them. Kleintop says one of the reasons for the CCI's success is its simplicity and user-friendly design.
"Unfortunately, many economic and market statistics are very arcane. Does a financial advisor really want to discuss with their retail investor clients indicators like unit labor costs, non-farm productivity--even gross domestic product, which is a very nebulous term?" Kleintop said. "The CCI takes the arcane art of economics and translates it into main street terminology to aid advisors in discussions on what's really going on in the economy and what it means to clients."