Late last month, “legendary” investor and man whose “bond king” title is now undisputed thanks to the retirement of Bill Gross, Jeff Gundlach, took to Twitter to proclaim that he had discovered “the most recessionary signal” the market had received to date.
That signal: the spread between The Conference Board’s Present Situation Index and the Expectations gauge, which ballooned to a whopping 82.3 in January.
That was the widest chasm since March of 2001 and the gap had only been wider on a handful of occasions – ever. The implication was that the economy might be about to take a swan dive. If you slap some recession indicators on top of the chart, you discover that when that spread approaches -50, it’s usually not a great sign for the economy.
We lampooned Jeff’s characterization of that leading “indicator” for a couple of reasons. First, we lampoon pretty much anything Gundlach says because, as successful as he most assuredly is, Jeff is something of a cartoon character whose pretensions to omnipotence are wholly laughable. But more importantly, we said the following on January 29 about that particular data point:
We don’t want to suggest that this isn’t notable. It may well be. And sure, we may all look up a year from now and find ourselves pointing to it as the definitive recession canary for this cycle.
But nobody knows that for sure. Of all the things there are to talk about [right now] between the Fed meeting, Apple’s earnings, the trade talks, etc., we’re supposed to believe that the spread between two sub-indexes from The Conference Board is what matters? Give me a break.
In addition to that, we noted that the numbers were doubtlessly impacted by the worst December for US equities since the Great Depression and the government shutdown.
Well, fast forward to February and guess what? The confidence index jumped to 131.4 from 121.7 last month, snapping a three-month losing streak and beating all forecasts.
So how about Gundlach’s greatest recession indicator?
Well, the Present Situation Index hit an 18-year high at 173.5, which means that the spread between the present situation gauge and expectations was still bound to be wide.
But as Lynn Franco, Senior Director of Economic Indicators at The Conference Board noted Tuesday, expectations recovered sharply in February after being “negatively impacted in recent months by financial market volatility and the government shutdown.” Specifically, the Expectations gauge jumped all the way back up to 103.4 from a revised 89.4 last month. That narrowed the spread between the two to -70 (bottom pane below):
Invariably, the Gundlachs of the world will contend that the chart in the bottom pane still screams “recession” and if you think that spread is indeed a leading indicator, then those folks are probably correct. After all, the narrowing in that spread is barely visible and gravity (not to mention history) dictates that further narrowing will likely come from a collapse of the green line (i.e., a plunge in Americans’ views on present conditions).
But the bounce back in the Expectations gauge in February should serve as a reminder that while there may be instances where it’s appropriate to make recession calls based on a subindex from a consumer confidence survey, the month after a market crash/right in the middle of the longest government shutdown in modern US history probably isn’t one of those instances.