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Dow’s Mind-Blowing Rally at Risk as Economic Index Flirts with Recession

Last Updated September 23, 2020 1:25 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:25 PM
  • The Dow rose by more than 100 points on Friday.
  • A comprehensive economic indicator is flirting with a year-over-year decline.
  • That’s happened five times in the last four decades, and four of those times heralded recessions.

It hasn’t been the most exciting week for the stock market, but the Dow Jones Industrial Average strung together enough winning sessions to plow back into record territory.

Following a three-month streak of backbreaking declines, the US economy finally appears to be stabilizing. But one comprehensive metric is getting dangerously chummy with a recessionary red flag.

Dow Speeds Toward 28,5000

Wall Street’s three most closely-watched indices extended their record-setting rally to close the week.

As of 12:48 pm ET, the Dow Jones Industrial Average had jumped 133.39 points or 0.47% to 28,510.35.

dow jones industrial average chart
The Dow cleared the 28,500 level on Friday en route to a weekly gain of nearly 400 points. | Source: Yahoo Finance 

The Dow rose in four out of five sessions this week, securing net gains of more than 350 points.

The S&P 500 outperformed its peers, adding 17.54 points or 0.55% to climb to 3,222.91.

The Nasdaq rounded out a bullish day for US stocks with gains of 39.74 points or 0.45%. The index last traded at 8,926.95.

Remarkably, the risk-on pivot put little pressure on the gold price, which edged just 0.18% lower. US Treasury bond yields ticked up as the CBOE VIX fell, and the yield on the 10-year note is nudging closer and closer to 2%.

Comprehensive Economic Index Edges Dangerously Close to Recession Alarm

This year has been an odd one for the US economy. While the bold recession warnings that accompanied 2018’s fourth-quarter stock market correction have been proven vacuous, many of the data points don’t look that impressive when isolated from those forecasts.

All the while, perma-bears have still found plenty of evidence to augment their doom-and-gloom predictions. Ironically, it’s often the same evidence that Dow Jones bulls use to support their much rosier forecasts.

Case in point: The Conference Board’s Leading Economic Index (LEI)  was unchanged in November. The LEI evaluates a weighted measurement of 10 different indicators to give a bird’s eye view of the economy.

leading economic index, dow, stock market
The Leading Economic Index snapped its three-month contraction streak, but the six-month average is still in negative territory. | Source: Conference Board 

The index had contracted for three straight months before November’s reading on Thursday, so bulls seized on this talking point: “US economy stabilizes .” That certainly frames the data in a positive light, though it ignores several important facts.

First, economists had expected the index to fare slightly better than unchanged. (The consensus forecast was growth of 0.1%).

Second, the LEI’s six-month average is still languishing in negative territory, and the year-over-year average is teetering on the verge of decline as well. LEI currently shows just 0.09% growth over the past 12 months.

According to Charlie Bilello, the CEO of Compound Capital Advisors, yearly LEI has flipped from positive to negative just five times over the past four decades.

leading economic index, recession, dow jones
Source: Twitter 

On four of those occasions, the economy descended into a recession within the next calendar year. The only outlier was January 1996, when year-over-year LEI turned negative for just one month.

Still, year-over-year LEI hasn’t turned negative yet. Assuming it does – and assuming that does presage a recession – it could take a while for that contraction to work its way into the Dow and the broader stock market.