Many investors are familiar with the yield curve. And they know looking at consumer confidence and unemployment trends can often give a sense of where the stock market is headed.
There are some indicators that don't receive as much attention from investors. Some are wacky, such as predicting what the stock market will do based on the Super Bowl winner. Others, though, might seem odd but actually make sense.
One such unusual market indicator is flashing a serious warning signal for stocks right now.
Pack it up
Order a product online to have it shipped to your home. Buy the same product in a physical store. Either way, the likelihood is that it will come in a cardboard box. Nearly 95% of all products in the U.S. are shipped in a corrugated cardboard box, according to Packaging Fulfillment Co.
Image source: Getty Images.
If demand for cardboard boxes is rising, it typically points to good news for the economy. The opposite is also true: Sinking demand for cardboard boxes could be a sign that the economy is slowing or about to do so.
This connection resulted in the creation of the "cardboard box" indicator. Even the economists at the Federal Reserve reportedly pay close attention to the metric. It was apparently one of former Fed chairman Alan Greenspan's favorite indicators.
Where the economy goes, the stock market is likely to go as well. If the cardboard box indicator predicts an economic downturn, it's likely also predicting a stock market decline.
Reading the card(board)
What is the cardboard box indicator saying these days? It appears to be flashing a major warning signal.
U.S. manufacturing of paperboard containers (i.e., cardboard boxes) has plummeted. This reflects the steepest decline since the one that occurred during the Great Recession in 2008.
US Industrial Production: Paperboard Container data by YCharts.
Bloomberg recently reported that paper mills in the U.S. are cutting back production. They're doing so because major retailers are purchasing less cardboard. That's a big hint that consumer spending is slowing.
While the S&P 500 continues to soar for now, it's a different story with the two biggest cardboard box manufacturers in the country. Shares of International Paper and WestRock have fallen around 10% and 20% year to date, respectively. Both companies reported lower revenue in their latest quarters.
Charles Schwab's Jeffery Kleintop thinks that we're in a cardboard box recession. While he isn't predicting a stock market crash, Kleintop doesn't believe that investors should count on seeing the kinds of gains enjoyed in the first half of 2023 throughout the rest of the year.
Thinking outside the box
The cardboard box indicator isn't the only metric that suggests gravity could kick in for the high-flying stock market. What should investors do? I recommend thinking outside the box (pun fully intended).
You don't have to completely avoid stocks even if you suspect the stock market will fall. Instead, you can invest in stocks that tend to perform well even during down markets.
Another approach is to put money into alternative assets that could rise during a stock market decline. Investing in bonds is one possibility. Sure, bond prices plunged last year as stocks tanked due to the Fed's aggressive interest rate hikes. However, it seems unlikely that the Fed will raise interest rates much higher.
Arguably the best thing to do, though, is to take a long-term view. Hold onto the stocks of companies that have great prospects over the next decade and beyond. Add to your positions when valuations are attractive. Even if the stock market falls, it won't be boxed in for too long.
