When examined with a wide lens, the stock market represents a pathway to long-term wealth creation. But when that lens is narrowed, the predictability of directional moves in the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth-powered Nasdaq Composite (NASDAQINDEX: ^IXIC) gets tossed out the window.
Although investors are reveling in the new bull market, the Dow Jones, S&P 500, and Nasdaq Composite have traded off bear and bull markets in successive years since 2020. There’s a real possibility this pattern persists in 2024, with stocks plunging, once again.
While there’s no such thing as a predictive indicator or economic data point that can, with 100% accuracy, forecast directional short-term moves in the Dow, S&P 500, and Nasdaq Composite, there are a few indicators and metrics that have strongly correlated with moves in the stock market throughout history. One such indicator, which has never been wrong, given a select set of circumstances, offers an ominous warning for investors in 2024.
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This recession-forecasting tool has an impeccable track record dating back more than 60 years
Though “impeccable” is a word rarely thrown around on Wall Street, the Conference Board Leading Economic Index (LEI) has a truly impeccable track record of forecasting U.S. recessions.
The LEI is reported monthly (usually during the third week of a month) and contains 10 inputs. While three of these inputs are financial in nature, such as the performance of the S&P 500, the other seven are nonfinancial and include the likes of the ISM Manufacturing New Orders Index, average weekly manufacturing hours, and average weekly initial unemployment claims, to name a few.
The purpose of these variables is to predict changes in the U.S. business cycle. The Conference Board specifically states that the LEI is aiming to forecast “turning points in the business cycle by around seven months.” In other words, it’s attempting to predict recessions before they’re officially announced by the National Bureau of Economic…
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