Since the early days of the human race, people have looked for signs about what's on the way. Some of those signs were reliable. Others weren't.
That's still the case today, especially with the stock market. Investors carefully monitor indicators that they think could provide hints about which direction stocks will move in the future.
One such top indicator recently hit its lowest level since the Great Recession of late 2007 through mid 2009. That might seem like a dark omen. But could it actually be good news for stocks?
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Low confidence
Every quarter, not-for-profit think tank The Conference Board and The Business Council, a forum for CEOs of the world's biggest companies, survey how chief executives feel about the U.S. economy. Since CEOs have their pulse on how business is going, this measure is viewed by many as a pretty good leading economic indicator.
The latest survey conducted by The Conference Board and The Business Council included 136 CEOs of major companies. And it shows that top executives aren't very confident about the economy. The score early in the fourth quarter of 2022 was 32, the lowest level it's been since late 2008. Any score below 50 is negative.
Nearly all of the CEOs (98%) are getting ready for a recession in the U.S. over the next 12 to 18 months. Even more (99%) expect a recession in the European Union.
The Conference Board's chief economist, Dana M. Peterson, said that only 5% of CEOs believe that general economic conditions have improved since six months ago. The same percentage think that business conditions will get better over the next six months.
What history shows
Obviously, this low level of CEO confidence doesn't seem to bode well for the economy. You might think that would also portend a gloomy stock market. However, that's not what history shows.
In late March 2020, CEO confidence dropped to what was then the lowest level since the Great Recession. The U.S. economy was already in a recession at that point as a result of the COVID-19 pandemic. But look at what happened with the S&P 500 shortly after CEO confidence bottomed out. (The shaded area on the chart indicates when the U.S. economy was in recession.)
By the time the CEO confidence results were made public, the stock market had begun to rebound. The S&P 500 went on to soar 45% from late March through the end of 2020.
There was a similar story during the Great Recession. The Conference Board's survey of CEO confidence plunged in the second half of 2008 as the financial crisis mushroomed. CEO confidence reached a nadir at the end of the year.
Around two and a half months into 2009, the stock market began to come back. This began what turned out to be the longest bull market in history.
Could stocks be about to rebound?
Don't bet the farm that stocks are ready to rebound just yet, though. For one thing, it's not known whether CEO confidence has truly bottomed out. More importantly, the metric hasn't always been a positive indicator of an impending stock market bounce. In late 2001, CEO confidence hit a low point. The following year, the S&P 500 nosedived.
Steep declines in CEO confidence, though, have been solid leading indicators of recessions. Perhaps the smartest thing investors can do is to buy stocks that are most likely to thrive during recessions.
Discount retailers could be good picks. Walmart performed quite well during the Great Recession while most stocks plummeted. Dollar General could chart a similar course if another recession is on the way.
Biopharma stocks that have positive pipeline updates and new drug launches can also defy gravity. For example, Johnson & Johnson delivered solid gains during the recession of 2001. Vertex Pharmaceuticals appears to be in a strong position to beat the market heading into 2023 -- just as it has done so far this year.
Even indicators that have been reliable in the past might not always work. Investors who simply buy shares of index funds and well-run companies at attractive valuations and hold them for years don't have to concern themselves with indicators. And they tend to enjoy the best sign of all -- a big dollar sign.
