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Global Leading Indicators, March 2025 - The world before tariffs, and after

The March 2025 edition of the global LEI chartbook can be found here. Additional details on the methodology are available here. I’ve added a few new elements: a chart showing the G20 LEI and its three-year rolling Z-score; a comparison between headline LEI diffusion and global equities; and a chart of the first three principal components of the LEIs. Of these, the first component is the most significant—as I’ll explain below.

As the name suggests, leading indicators are designed to provide early signals on the business cycle, and by extension, on the cyclical component in financial markets and the most cyclical individual sectors. However, there are times when turning points or events disrupt the underlying conditions so abruptly that they effectively reset the clock. Trump’s tariff shock—and its implications for global goods and capital mobility—is one such event. But for the record: what did the global economy look like on the eve of this tariff shock? As it turns out, it was doing quite well.

All Change?

Last week was a good day for my boss Ian Shepherdson who has been sticking his neck out since the beginning of the year with a call that the Fed would cut rates this year by more than the consensus believes. It was a bad day for a lot of other forecasters and investors. I recently joked with him that we were just one bad payroll report away from markets freaking out. That report landed on Friday, pushing already nervy markets into near meltdown. We know the drill; bonds soared, equities crashed, and “US recession risks” hit a headline near you. Of course, the Fed hasn’t cut rates yet, but even before Friday’s data, everyone expected the first cut in September. Expectations are now shifting towards a 50bp reduction, and further cuts in quick succession after that. The decision to hold rates in July is now freely being seen as a mistake.

Portfolio optimization with US large cap equity sectors

I am still in a quant-mood at the moment, so today I will go through some work I’ve done on portfolio optimization with US large cap equity sectors. I am doing this to augment my current MinVar framwork, which I use for my own investments. A quick re-cap on the basics of portfolio optimization, with advance apologies to PMs reading this and lamenting that I’ve missed something. Finance has two workhorse models; the tangent portfolio, which places the investor on the efficient frontier, where risk-adjusted return—or the Sharpe ratio—is maximised. Or the minimum variance portfolio, which offers exposure to the combination of assets with the lowest variance, or standard deviation, regardless of return. These portfolios often are estimated given a set of constraints, as I explain below. Assuming most portfolio allocation decisions start with one of these ideal models in mind—you either want to achieve the best risk adjusted return or the lowest volatility—the difference between the textbook models and real-time allocations is governed by the following layers of complexity.

Things to think about #2

I’ve recently come back from a week on Ibiza—the smaller and cooler of the main Spanish Mediterranean isles—enjoying what has to be one of the most fantastic climates on earth. I come back to the realisation that I could have been more spendthrift in the pool bar despite its grotesquely overpriced drinks and snacks. Stocks are flying, credit spreads are narrow and volatility has plunged to a new low for the year. My relatively defensive portfolio is currently tracking a punchy 3.8% monthly gain for May, just shy of the 4.4% rise in the S&P 500. Long may it continue. I will have more to say about this in due course, but in the first instance, my recent work suggests that this rally has one strong tailwind on its side; the cyclical picture in the global economy has improved. My measures of global cyclical activity hit a new high at the end of Q1, and into Q2, from a trough last year, and cyclical equity returns are now re-accelerating, after softening a touch at the start of the year.

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