16 Straight Drops in Leading Indicators: Cause for Alarm?

ETF-savvy advisors, investors may have advantages if a recession arrives.

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Reviewed by: Lisa Barr
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Edited by: Ron Day

Sixteen straight losses are bad for a sports team. When that’s the record of an index designed to help investors understand where the economy’s going, financial advisors and their clients better take notice. 

The Conference Board’s U.S. Leading Economic Index has fallen for 16 months straight. The decline looks eerily similar to those that occurred leading up to the 2000 dot-com bubble bust, the 2007-2009 financial crisis and the late 2018-through-early-2020 period that culminated in a market crash. 

During February through March 2020, the U.S. Leading Economic Index foreshadowed a weakening economy, well before the contagion was front-page news. 

For financial advisors, history is a great reference, but it doesn’t guarantee anything. That’s especially true with financial markets operating differently than in the past. 

Recession Worries Follow Falling Leading Indicators 

After 16 straight losses, something’s not right in the U.S. economy no matter what the cheerleaders on financial television and social media say. The Conference Board said it expects a “short and shallow recession in the Q4 2023 to Q1 2024 time span.” 

While advisors may be tempted to dive into the narrative battles, such as “soft landing” versus “hard landing” versus “no landing” when discussing the future path of the economy, what ultimately matters to investors is that the price of what they own in their portfolios goes up during the time they own it, and that they don’t suffer emotionally charged major losses on the journey. That allows the advisor to keep them on track without risking hysterics for all involved.  

So, how can advisors use ETFs to help move through this uncertain period? Here is a high-level view, using the three traditional asset classes: cash, bonds and stocks. 

Cash  

Scores of ETFs target different parts of the short-term bond sector, which now offers competitive yields. For those looking for a simple place to start, there is the $20 billion iShares Short Treasury Bond ETF (SHV), which launched in 2007. It is a highly liquid ETF that owns securities across the full spectrum of U.S. Treasury bills; namely, as far out as 12 months to maturity. SHV yields just about 5%, versus about 0% back at the start of 2022. 

Bonds 

It may be tempting to try to “reach for yield” by going beyond U.S. Treasury credit quality. But given the picture painted by the U.S. Leading Economic Index, those wanting to augment their cash-equivalent position might start by evaluating ETFs such as the SPDR Portfolio Intermediate Term Treasury ETF (SPTI), which essentially picks up where SHV leaves off, at least in terms of maturity range of the bonds it holds. It owns U.S. Treasury notes between one to 10 years maturity. Its current average duration is five years, and it yields around 4.2%. 

Stocks 

The stock market’s strong run this year was driven by a small number of big tech stocks, all household names to investors. So moving forward, one way to navigate this part of the market is to prioritize company quality, as opposed to sheer size or sector. The Invesco S&P 500 Quality ETF (SPHQ) is one of many equity ETFs that advisors and investors can find using etf.com’s ETF Screener. SPHQ applies a multifactor filtering process, starting with the S&P 500 stocks, to construct and maintain a portfolio of 100 stocks that meet the manager’s quality standard. 

The leading indicators, now down for 16 straight months, may lead to a decline in portfolio values. However, advisors who get in sync with the higher-risk environment, and the escape hatches offered by ETFs for precisely this type of investment climate, stand a chance to not only retain client assets, but create a referral machine as we head into the tricky autumn season. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.