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Stocks Roar on Positive Leading Indicators

The discouraging June jobs report published two weeks ago has been overtaken by some really positive leading indicators for the economy.

Initial jobless claims have plunged in recent weeks.

Housing starts are up, although modestly, for four straight months.

And today, the Index of Leading Indicators(LEI) from the Conference Board provided the most bullish sign yet that the recession is ending.

For the first time in four years the LEI is up three straight months, with a better-than-expected 0.7 percent gain in June following upwardly revised gains of 1.3 percent in May and 1 percent in April. Higher stock prices, falling first-time jobless claims, rising housing starts, and a steep upward sloping Treasury yield curve led June’s advance.

Stocks roared on the news, with the Dow up almost 100 today and the S&P 500 reaching a new yearly high. Goldman Sachs strategistsare now expecting a barnburner second-half stock market rally of 15 percent to 1,060 by year-end. Right now the level is almost 950.

Profits continue to come in stronger than expected, mostly from rabid cost-cutting which has caused a steep drop in jobs and hours worked. But if the leading indicators are correct, and the economy expands by even 2 percent at an annual rate in the second half of 2009, then top-line corporate revenues will start rising again, taking some of the pressure off job cuts and rising unemployment.

As I’ve said before, stocks are the best barometer of future business and the economy. This current rally is signaling that business conditions are getting better, not worse. There are too many negatives out there for the kind of 5 or 6 percent growth that should happen after a deep recession. But I’ll go out on a limb with two positives: Nationalized ObamaCare and cap-and-trade are dead in the water. That includes their massive tax hikes and central-planning controls of the economy.

Oh, and did I mention that in early Rasmussen polls for the hypothetical 2012 race, Obama is now running even with Mitt Romney and Sarah Palin? There’s gotta be something good embodied in those numbers.

Questions? Comments, send your emails to: lkudlow@kudlow.com