Economic Warning Signs: Is Your Portfolio Ready?

You’ve likely noticed the recent market volatility.

But did you know certain sectors are flashing warning signs similar to those seen before past recessions? Let’s dive deep into what’s happening and what implications does it have for the markets.

Transportation Sector: The Canary in the Coal Mine

In 1999, the transportation sector plummeted to the lowest levels in decades relative to the S&P 500.

This drop was a major economic warning signal in 1999. It suggested the U.S. economy was weakening substantiallyduring that period.

Indeed February 2000, the unemployment rate began to trend up, leading to the 2001 recession.

Performance of US Transporation Stocks and Unemployment Rate

A similar pattern occurred in 1973, right before one of the most severe economic downturns in history.

The unemployment rate began to rise shortly after severe underperformance of transportation stocks in 1973.

Performance of US Transporation Stocks and Unemployment Rate

Fast forward to 2024: We’ve seen one of the worst performances of transportation stocks since 1999. The unemployment rate in the United States is already beginning to rise.

Performance of US Transportation Stocks and Unemployment Rate

Key Point: This pattern has repeated several times over the last 60 years of data. Every time the transportation sector weakens significantly, a recession in the U.S. follows very shortly.

Performance of US Transportation Stocks

Consumer Stocks: Another Red Flag

Consumer stocks have been underperforming significantly over the last year.

What this means:

It’s a sign that U.S. consumers are weakening.
A weakening consumer is less likely to spend, which slows the economy.
This increases the odds of the economy heading into a recession.

We saw similar patterns before the 2020 recession and the 2008 financial crisis.

Performance of US Consumer Stocks

We’re currently in the process of seeing this happen. But, how quickly is all of this going to unfold? In order to stay one step ahead of the game, make sure to access all our proprietary asset Models + Macro Newsletter here.

Glimmers of Hope: Not All Doom and Gloom

Despite the warning signs, some sectors are showing resilience, indicating that the runway has still not run out completely.

Financial Sector:

Has been performing quite well over the last few months.
When we zoom out and look back on the last year, it’s remained quite resilient.

Performance of US Banking Stocks

Heading into both the financial crisis and the 2020 recession, we saw the banking sector collapse. The current resilience is actually quite a good sign.

Performance of US Banking Stocks

Home Building Sector:

Has stayed incredibly strong over the last couple of years.
Typically, heading into recessions, the home building sector declines.

Home building is notoriously famous for being a leading indicator of the economy. The fact that they’ve been strengthening here is not a recession signal.

XHB/SPX

What This Means: We have strong evidence that we’re nearing a recession in the U.S., but there are still parts of the economy that have yet to break. This could mean we’re in for another few months of market upside before we see a full-blown recession.

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The Topping Process

The S&P 500 is showing volatility, but key moving averages are generally pointing upwards. This suggests there is still upside momentum because some parts of the economy are still holding up.

This price structure is different to the major prior tops of 2008 and 2000.

2008 Top:

The price action was a lot weaker in the topping process.
Moving averages (MAs) were pointing upwards in July 2007.
As the economy transitioned into recession, these MAs started to curve downwards.
The S&P 500 broke decisively below them.

S&P 500

2000 Top:

MAs were pointing to the upside in July 1999, showing plenty of upside momentum.
It wasn’t until September 2000 that these MAs began to curl downwards.
Price decisively broke below them, setting off the large bear market that followed.

S&P 500

Today: While many have turned bearish during this recent volatility, we could still have multiple months of a topping process before the market actually heads downwards.

The ISM PMI: A Key Economic Indicator

In order to assess the risks of a recession, it is important to look at the manufacturing sector.

The ISM manufacturing PMI is a survey on economic activity that provides useful insights into the state of the economy. But, how do you interpret it?

High readings mean the economy is strong.
Low readings mean the economy is contracting.

The last 2 readings showed a clear rollover in economic activity. This has many concerned that the economy is entering a recession.

US Manufacturing PMI

Looking at all recessions going back to 1970, we see that all of them had the PMI go below 45. Currently, the ISM PMI is still at 47.2. This isn’t very impressive growth, but it’s definitely not recession territory yet.

ISM Manufacturing PMI

In 1995, the PMI was at exactly the same level as we are today.

Here’s what happened then:

The S&P 500 was melting up during that period.
The stock market continued to rise in 1996 and 1997.
No recession materialized during those years.

Important Note: While this isn’t the scenario we expect today, it demonstrates that the exact timing of a recession can greatly impact stock market performance.

ISM Manufacturing PMI