Over the weekend I was writing a weekly update to my newsletter subscribers and I was looking at the economic calendar for this week. One of the reports due out this week is the Leading Indicators report for January. I went back and looked at where the readings have been over the last five months and that caused me to flashback to 2007. You see, the leading indicators have shown negative readings in four of the last five months and the lone month it wasn’t negative was November when it came in at zero.
The leading indicators report isn’t as closely watched as a number of other indicators, but it can be a tool in predicting recessions. The reason I flashed back to 2007 was that seeing the negative readings in the past five months reminded me of an article I wrote back then. I tried to find the article to see exactly when I wrote the article, but the website it was posted on has since been shut down. I can tell you that it was in the fourth quarter of 2007 and the title of the article was First Recession Bell Rings. It was the leading indicator reports that led me to write that article and now we are looking at similar readings.
The reading in December came in at -0.3% and that caused the cumulative reading for the past 12 months to reach zero. If the January report comes in with a negative reading, it will put the cumulative total into negative territory and that is one aspect of the report that suggests a recession is around the corner. Analysts expect the January report to show an improvement with a reading of 0.5% being the consensus.
The leading indicators reports weren’t the only thing that made me flashback to earlier years in the investment publishing industry either. When I heard on President’s Day that Apple had cut its revenue forecast and that Walmart missed its earnings estimate, it reminded me of the fall of 2000. That was my first year in the investment publishing industry and I remember how hard the market got hit when Apple and Intel both got crushed after earnings’ warnings.
The Apple revenue cut was based on production issues in China from the coronavirus. Some investors may look at this and say, “Oh, it’s just temporary.” But if we look at the leading indicators reports, they have been weakening for almost six months now and that is way before we ever heard anything about the coronavirus.
Something I have noticed about trying to predict if and when the next recession and bear market will hit is that we never know what the trigger will be. In retrospect and with 20/20 hindsight, we probably should have been better prepared for the bear market in 2000. Businesses and consumers alike had done a tremendous amount of spending on new technology in 1998 and 1999. Concerns about the Y2K issues with technology caused a rush to upgrade hardware as well as software. This disrupted the normal upgrade cycle and left little new business in 2000.
In 2007 it was a lock-up in the credit market that triggered the sub-prime financial crisis. The impact snowballed and that led to the “great recession” as well as a huge selloff in stocks. This particular recession and bear market were a little more surprising, at least in my opinion.
It’s kind of scary to think about the current economy and stock market and have flashbacks to 2000 and 2007. The 2007 bear market didn’t start with companies missing earnings estimates and issuing revenue warnings, but paying attention to the leading indicators could have spared investors from a lot of the pain that occurred in 2008 and early 2009.
In 2000, the drop really started in the earnings season in October of that year. The decline accelerated after the attacks on September 11 and the bear market continued through December 2001. I was paying attention to the leading indicators report back then, so I can’t say how they performed and if they would have given investors a warning or not. I do know that if investors had moved money out of stocks after the S&P saw its 13-week moving average cross below its 52-week moving average they would have missed a great deal of the bear market pain.
I have written a number of cautionary articles for Bull Market Rodeo over the last year or so and the market has continued to rise. I haven’t moved completely out of stocks in my own portfolio and I wouldn’t suggest that anyone else do that either. I think you have to pay attention to the earnings reports and the economic indicators and make small adjustments to your portfolio. If more companies start issuing earnings warnings, dial back the percentage held in stocks. If the leading indicators continue to come up negative, drop the percent allocated to equities a little more. You don’t have to jump from an 80% allocation to zero in one move.