Before the devastating tsunamis of 2004 rolled over the coastlands around the Indian Ocean, local animals seemed to sense the coming disaster. Eyewitnesses reported that elephants moved to higher ground, flamingos abandoned their low-lying nesting areas, and buffalo stampeded to a hilltop—in some cases hours before the deadly waves struck. (1)
Scientists are still trying to figure out how the animals were alerted to the danger well before any of the human-designed warning systems.
In the same way, market analysts have been looking for early predictors of a recession. Something that will act as a canary in the coal mine to warn investors to take action before a downturn hits.
To this end people have identified trends in obscure corners of the economy as predictors of a looming market correction. Here are a few examples. (2)
Men’s Underwear Index – When sales of briefs and boxers are down, a recession is predicted to follow. This is based on the observation that men put off purchasing apparel when times are tough. Especially items that nobody else will see.
Cardboard Box Index – Since most goods are shipped in cardboard boxes, when companies are ordering fewer of these containers, a slowdown may be on the horizon.
Diaper Rash Index – Some believe that during a downturn parents will try to save money by changing diapers less often, thus causing an uptick in the sales of ointments and creams to treat irritation.
Diesel Index – A drop in the price at the pump predicts a recession. The Wall Street Journal recently reported that the price of diesel has fallen significantly from what were recent highs. They attributed the change to a demand slowdown in the trucking industry. Companies are shipping fewer goods and some see this as an early indicator of a coming downturn. (3)
However, rather than leave this theory unchallenged, the WSJ points out that there are many factors that likely have contributed to cheaper diesel. For example, prices had previously spiked on news of the Russian invasion of Ukraine. Globally, there was less demand for fuel over the winter. And companies are still sitting on inventory surpluses they built up due to the pandemic.
So, while dropping diesel prices can be a precursor to a recession, there are lots of other reasons that might be contributing factors. The same can be said for the other so-called “indexes” or indicators listed above. A slump in men’s underwear sales may indicate a downturn is on its way, or it could simply be the result of changes in fashion or demographics.
Unfortunately, there’s no reliable way to predict major swings in the economy precisely. History in global markets indicates that trying to get the timing right by anticipating changes is more likely to be detrimental to your long-term strategy.
Knowing this, the prudent investor will hold a properly diversified portfolio, one that can take advantage of unexpected gains, while at the same time seeking to mitigate losses during volatility. He or she will follow a plan tailored to their unique income situation, retirement goals, and time horizon—all in partnership with a trusted advisor.