Financial Distress & Recession Indicators for the Stock Market - Fundamental Analysis

Recession Indicators

The global recession probability on MacroMicro collates a number of recession indicator on a global scale to provide an global recession probability Index. (You might need to scroll through the "Indicators for Market Reversal for the Next 6 Months" section to see this chart. But also the homepage has teh Index value and a colour indication of it's severity)

The Duncan Leading Indicator is a respected and accurate leading indicator pointing to potential downturns anywhere between 1 to 4 years before the downturn materialises. It's more of an economic gauge of the longer term momentum trend in the economy.

The Conference Board Recession Indicator

Conference board LEI Index spikes down when recession is incoming….2024 looks more like 2008… 

... but, Oil was a major difference between 2007 and now. If an escalation of the wars sparks an oil spike then risk increases for another 2008 style GFC: - 

US Financial Conditions Index

The Chicago Fed index tracks a range of financial conditions to provide a measure of the overall health of economic conditions centred around credit, risk and leverage. The visual chart protruding above the flat zero line is a strong signal that the markets are in distress and indeed we see this happening during covid and the GFC 2008...

• National Financial Conditions Index (NFCI)

Volatility Indicators

The MOVE index tracks the volatility in the bond markets. In tha long term chart below, we can see that there is a strong correlation between the MOVE index and the SP500. When bond market volatility increases then it is likely that the SP500 will start moving down. Bond market volatility is associated with interest rate volatility. So when you see ineterest rates chopping and changing and moving up or down in a short space of time, it's bad sign for the stock market. In the chart below the MOVE index is inverted to make the correlation clearer: -

The VIX Crossover

When the VIX 50 day and 200 day MA are both moving up above about 15 to 17 then this is often a warning sign of trouble ahead. Greater volatility is when markets can sell off and slide to the downside ...

VXV:VIX ratio above 1.2 correlates quite nicely with market tops and lows below 1 with market bottoms...  

Bond/Credit Market Spreads

The difference between riskier but high yielding junk bonds and 'risk-free' government bonds is highly correlated with declines in the stock market.

The Bank of America High Yield Index Option Spread is another one popular credit spread chart that is often quoted as a measure of financial stress in financial markets. the DotCom crash and the GFC crash show clear spikes but the situation currently at the time of writing really shows no signs of distress whatsoever...

Financial Distress Signal - Loan Delinquencies

Highlighted on the chart below in red is the rise in delinquencies ('All Loans') leading into major financial crises. Falls in inflation can precede a drop in delinquencies and resolution of the financial crisis. In 2024 however we are not seeing the drop in delinquencies but the big question is, ofcourse, are the delinquencies going to keep rising into a new financial crisis?

It's worth keeping one eye on the Invesco Senior Loans ETF (Leveraged Loans) ...

Another interesting financial distress indicator for the US economy is the auto-loans delinquency rate. As you can see below, these trend up or spike before a financial crash...

When corporate profits head down whilst unemployment trends up, it's another warning sign that the economy is struggling... 

... other distress signals shown against unemployment and/or social security claims for unemployment : -

• average hourly earnings

• credit card delinquencies

The chart above shows credit card loan delinquencies but the delinquency rate on ALL loans shows a clear relationship with an upturned slope and recessions...

Secular declines in consumer sentiment is a secular sign of financial distress leading to secular declines in the stock market...

The 10 year / 3 month yield curve

The market keeps a close watch on the 10year/2year Us Treasury yield curve but the 10year/3month correlates very accurately with the beginning of major downturns in stock markets when the yield curve inversion starts to come back up from a deep yield curve inversion as seen by the red shaded area below...

As for small caps, the best time to invest in this asset class is when the central bank(s) reduce the central rate from a high point to a low point, which is generally after something broke in the financial markets and they need to take drastic action...

Bankruptcies

In an economic downturn, bankruptcy levels spike and so tracking bankruptcies in the US will furnish us with another clue as to where the economy is heading.