What Is the S&P 500 Telling Us About a Recession?

Friday, April 12, 2019

According to the fourth quarter 2018 "Duke CFO Global Business Outlook," fully 82% of the CFOs surveyed believe that the United States will have entered a recession between first quarter 2019 and fourth quarter 2020. The largest share, 17%, pegged third quarter 2019 as the most likely quarter in which it will start. As we wrote several weeks ago, we do not believe the United States is currently in a recession. While growth is moderating, we are late in the cycle, and there are a number of red flags waving, a larger number of those flags are still green/amber. In addition, we are starting to see some slightly better economic data, the developed market central banks have removed the risk of overdoing it and are more aggressively underwriting the recovery while setting aside fears of inflation, and the China stimulus is starting to kick in. Furthermore, the U.S. consumer is not nearly as overextended as it was heading into the last downturn. Thus, while growth is unquestionably more precarious, the data is not convincing enough to definitively lean in favour of a recession taking place in the next 12 months. Nevertheless, in this week's Economics Weekly, we've decided to have a look at the behaviour of just one leading economic indicator—the S&P 500 and its underlying sectors. In the past this has been a good (but also controversial, as Paul Samuelson's famous quote about the index predicting nine of the last five recessions reminds us) predictor on past recessions.

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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.

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