A lagging indicator is a measurable economic factor that changes only after the economy has begun to follow a particular pattern or trend. It is often a technical indicator that trails the price action of an underlying asset, and traders use it to generate transaction signals or confirm the strength of a given trend. Since these indicators lag the price of the asset, a significant move in the market generally occurs before the indicator can provide a signal.
An example of a lagging indicator is a moving average crossover, because it occurs after a certain price move has already happened. Technical traders use a short-term average crossing above a long-term average as confirmation when placing buy orders, since it suggests an increase in momentum. The drawback of using this method is that a significant move may have already occurred, resulting in the trader entering a position too late.
Defaults of bonds and other debt types are a lagging indicator of the health of the debt market as a whole. On July 12, 2016, the amount of defaults for the first half of 2016 was found to be $50.2 billion, soaring past the $48.3 billion total defaults for all of 2015. This means the default rate for the first two quarters of 2016 was 4.9%. This is a lagging indicator that the bond market, specifically corporate debt, might be unstable in 2016.
Of the $50.2 billion in defaults, energy company defaults totaled $28.8 billion, which is a default rate of 15% within the industry. This is part of a lagging indicator, as the recent recovery in oil prices coincides with the price of junk bonds in the energy sector. Junk bond prices actually increased, and these prices were a lagging indicator of the increasing oil prices.