Land of Confusion: Soft or Hard?

Lead the way

Recession chatter has picked up increasingly for numerous reasons, not least being the spike in oil prices, slowdown in economic growth estimates, and the Fed's transition from accommodative to tighter monetary policy. While timing a recession is an impossible task, understanding that one is on the horizon (regardless of when it arrives) is crucial. We think it's prudent on the part of investors to consider the items that are typically checked off leading up to—and in—recessions.

Better or worse matters more than good or bad

The table below shows the components of both the Leading Economic Index (LEI) and Coincident Economic Index (CEI) from The Conference Board. The 10 components of the LEI represent parts of the economy and market that lead overall economic growth, thus providing a "tell" as to whether an inflection point is upon us.

We are firm believers that, when it comes to the relationship between economic data and the stock market, better or worse matters more than good or bad; or, in other words, trends and direction are more important than levels. You can see in the table that even though the levels of most indicators (except consumers' expectations for business conditions) are strong or fair, the trends are less impressive. This hasn't led to a marked deterioration in the overall index, but if the trend column turns increasingly yellow and red, levels would inevitably follow the same pattern.

Healthy levels, weakening trends

Source: Charles Schwab, Bloomberg, The Conference Board, as of 4/15/2022.