Mixed Economic Messages. Is Transport Slowdown a Red Flag? Investor Insights Unveiled

Chart of the week

This chart shows the annual growth rate of the US Leading Economic Index (LEI) over a period from January 2000 to April 2024. The LEI is measured on a six-month annualized basis and expressed as a percentage. The graph illustrates three important elements:

- The blue line represents the annual growth rate of the LEI.
- Red sections indicate recession signals.
- Black sections show warning signals for possible economic downturns.
The gray vertical bars mark the phases of economic recessions as identified by the NBER Business Cycle Dating Committee.

Why this is important
The Leading Economic Index (LEI) is a composite economic indicator published by The Conference Board. It is made up of ten economic indicators that serve as leading indicators of economic development. These indicators include, among others

- New industrial orders
- Initial jobless claims
- Share prices
- Money supply development
- Interest rate spreads

The LEI is often used to forecast future economic activity and turning points in the economy. A falling LEI can indicate an impending recession, while a rising LEI points to an economic recovery or expansion.
Historically, whenever the LEI fell into negative territory and remained there, there was a high probability of a recession occurring. This was particularly the case in 2000, 2008 and 2020, as the yellow recession bars in the chart show.

This is the first time since 2000 that the LEI has breached the -5% mark without a recession occurring. But are we already safe and the recession is off the table? Not quite, as other indicators show a very different picture.

This chart shows the year-over-year (YoY) percentage change in full-time employment in the U.S. from 1968 to 2024. The data is presented in percentages and illustrates the annual growth rate or decline in full-time employment. The important elements of the graph are:

- The black areas represent the positive year-over-year change in full-time employment.
- The red areas mark the negative year-on-year change in full-time employment.
- The gray vertical bars represent recession periods as defined by the NBER Business Cycle Dating Committee.

At this point, based on the last data points in the chart, we see that the year-on-year change in full-time employment is negative (-0.41% in 2024). This decline is similar to patterns observed in previous recessionary periods. The current negative value, although less extreme than in some previous recessions, indicates a slowdown in the labor market.
To summarize, the current negative change in full-time employment is a warning sign of a possible impending recession in the US. The historical correlation between negative changes in full-time employment and economic downturns reinforces this concern.
As explained in previous market reports, we currently see about half of the economic indicators saying that a recession is no longer coming and 50% saying that it is coming.
In a market phase like this, it is best to act very conservatively. It may be that if the stock market rises sharply, you earn a little less but are protected if the recession does come.

Will nothing more be transported?
One possible reason why many economic indicators are currently no longer working is that the US economy is undergoing fundamental changes.

This chart shows the development of the Truck Tonnage Index (TTI) compared to the S&P 500 Index from 2002 to 2024. The chart uses two Y-axes:

- The left Y-axis (LHS) represents the Truck Tonnage Index in orange.
- The right Y-axis (RHS) represents the S&P 500 Index in blue.

From 2000 to 2020, there was a very high correlation between the two indices. Everything that is consumed must also be transported. This correlation goes back even further. One of the oldest technical indicators that Mr. Dow (the founder of the Dow stock indices) looked at was the comparison between the Dow Jones Industrial and the Dow Jones Transportation.

The Truck Tonnage Index reflects real economic activity, especially in the freight transportation sector. A stable or rising TTI indicates healthy industrial activity and consumer demand. While the TTI shows a more stable but less dynamic development, the steep rise in the S&P 500 reflects investor optimism supported by favorable financial conditions and positive expectations for corporate earnings.
The economy has been changing since the COVID crisis. The great upswing in technology stocks began, which then gained even more momentum due to the trend towards artificial intelligence.

The chart shows the expected earnings of the Magnificant 7 until the end of 2024 (gray line) and those of the remaining 493 companies (blue line) of the S&P 500 (black line).
No major earnings growth is expected for the index as a whole. All of the earnings growth comes only from the Magnificant 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla).

Many of the traditional economic indicators cannot cope with this. This is also the reason for the very different statements.

The chart shows the weighting of the 10% largest companies by market capitalization in the S&P 500. Only twice since 1926 has the weighting been as high as it is today:

- 1926 to 1933:
That was the time of the Great Depression. The stock market was dominated by value stocks of companies that manufactured products for everyday use: Protecter &Gamble, Coca Cola and utilities in the electricity sector.
- 1998 to 2000:
The “first” tech bubble. All companies related to the Internet soared to astronomically high valuations.

Will the artificial intelligence trend change our lives? The answer is clearly yes, but there are still limits. More and more regulations are being issued that restrict its use and therefore also the earning potential of companies. This could happen in the next 6 months, but also in the next 2 years.

As before, 90% of the things we consume have to be transported. Even the “old” economic indicators are not dead yet.

The chart shows an index that shows how strongly institutional investors are positioned in equities. The index mixes the expectations of institutional investors, the proportion of their asset allocation in equities and in cash.
If the index is at its maximum, investors' expectations of returns are unrealistically high and they have used up their cash to buy additional shares. This usually leads to a major correction in the markets.
The index shows that we are close to historical highs, but that there is still room for the index to rise further.  This means that institutional investors still have cash to push prices up further, but not much. However, it is becoming dangerous and a correction could occur at any time.

The chart shows the asset allocation of pension funds and foreign investors in the USA. Things look more critical here. The allocation to equities is at its highest level in the last 35 years. These investors are no longer expected to make large purchases of equities.
The conclusion to be drawn from the two charts is that the potential buying volume of investors to drive prices up further is becoming ever smaller. In such a phase, investors are well advised to reduce the risks in their portfolios somewhat.