TLT Surges on Weaker Leading Economic Indicators Data
- Bond ETFs jumped as June’s LEI unveiled a slowing economy ahead, despite the stock rally.
- While it's often accurate, the LEI is not infallible.
The iShares 20+ Year Treasury ETF (TLT) climbed today, as falling Treasury yields signal investors anticipate a weakening U.S. economy during the second half of 2025. That reaction followed the release of the June Leading Economic Index (LEI), which fell 0.3% after a flat reading in May and declined 2.8% during the first half of the year, more than double the pace seen during the second half of 2024.
Although a strong stock-market rally limited the fall, the deeper trend points to underlying economic stress.
“The U.S. LEI fell further in June,” Justyna Zabinska-La Monica, The Conference Board's senior manager of business cycle indicators said in a statement. “For a second month in a row, the stock price rally was the main support of the LEI. But this was not enough to offset still very low consumer expectations, weak new orders in manufacturing and a third consecutive month of rising initial claims for unemployment insurance.
TLT was up a sharp 1.3% during midday trading following the report, while stocks resumed their upward trajectory with the S&P 500 rising 0.5%.
TLT vs. VOO: Stocks Rally, But Bonds Warn
Despite the S&P 500 hitting fresh highs, buoyed by roaring equity momentum, the LEI components tell a different story.
Weak consumer confidence, soft new orders in manufacturing and a spike in initial jobless claims weighed heavily on the index . This divergence led TLT investors to anticipate an economic drag in the back half of the year, while equity markets continue their ascent, seemingly climbing a wall of worry, as the stock market proxy Vanguard S&P 500 ETF (VOO) has rallied 27% since the post-Liberation Day tariff pause.
ETF Comparison Analysis
Fund | ||
Three-Month Performance | -1.5% | 19.6% |
Year-to-Date Performance | -0.3% | 7.8% |
One-Year Performance | -4.3% | 15.8% |
Three-Year Performance | -6% | 18.5% |
Five-Year Performance | -10.1% | 15.8% |
Source: etf.com & Factset data. Price returns over one year are annualized. All returns are total returns unless otherwise stated.
Tariffs, Inflation and Consumer Spending Risk
A major concern now is the return of U.S. tariffs on Aug. 1, which could drive import prices higher, stoke inflation and squeeze consumers. Since consumer spending accounts for roughly two-thirds of U.S. GDP, weaker household demand due to rising prices can slow the economy.
With unresolved trade issues and tariff risks looming, bond markets are already pricing in slower growth—while equities maintain their calm.
LEI’s Recession Signal: History Offers a Warning
While the LEI isn’t a perfect forecast tool, it’s a widely respected leading recession indicator, typically with a lead time of six to 12 months.
The Conference Board’s “3Ds” test, which looks at six-month diffusion and growth, flagged a recession signal: Diffusion remains below 50, and the index has contracted more than 4.1% annualized.
Historically, such readings often precede economic slowdowns. That suggests today’s LEI weakens investor confidence in prolonged market strength.
Strengths of the LEI as a Prediction Tool
The LEI has a strong historical track record of peaking and declining before recessions. Consistent declines over several months, particularly when the six-month growth rate falls below a certain threshold and the diffusion index (indicating how widespread the declines are among components) is below 50, have often preceded economic downturns.
Comprehensive Nature
By combining 10 different indicators that cover various aspects of the economy (e.g., manufacturing, employment, housing, financial markets, consumer expectations), the LEI provides a more holistic and reliable signal than any single indicator alone.
Forward-Looking
As a "leading" indicator, its explicit purpose is to anticipate turning points in the business cycle, offering an early warning system for investors, businesses and policymakers.
Limitations of LEI
While it's often accurate, the LEI is not infallible. There have been instances where the LEI signaled a potential downturn but a recession did not follow, sometimes referred to as "false positives." This can happen if the underlying economic conditions shift or if other factors mitigate the LEI's signal.
Furthermore, the LEI doesn't provide details about the severity or duration of a potential recession or expansion, and it is subject to revisions.
Context is Key
The LEI should always be used in conjunction with other economic indicators and market analyses. Relying solely on the LEI can lead to incomplete or misleading conclusions. For example, some critics argue it may be overly biased towards the goods sector and might not fully capture the dynamics of a services-dominated economy.
Bottom Line
Though the LEI isn’t foolproof, its historical reliability during six-month declines and low diffusion readings highlight the potential market risk over the next six to 12 months, hence TLT’s price rise Monday reflecting investor expectations for slower growth during 2025's second half, despite a strong stock market.
The return of tariffs on Aug. 1 could solidify this slowdown via inflation, which may lead to slower consumer spending, an economic engine for the U.S. and global economies.
In short, while markets chase record highs, economic indicators like the LEI suggest warning lights are flashing. Keeping portfolios balanced and flexible could prove critical in the months to come.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing in ETFs involves risks, and investors should carefully consider their investment objectives and risk tolerance before making any investment decisions.
At the time of publication, Kent Thune did not hold a position in any of the aforementioned securities.
