MW This early-warning indicator is telling the stock market that a recession is more likely

By Mark Hulbert

If you're like many U.S. consumers, you're more worried now about money

There's a significantly elevated chance that a U.S. recession will begin within the next 12 months. The odds are roughly one in five, in fact, based on the unusually wide spread between the Conference Board's Consumer Confidence Index $(CCI)$ and the University of Michigan's Consumer Sentiment Index $(UMI)$.

Though you may regard a one-in-five chance as unlikely, you should know that the risk now is abnormally high. When the spread is above the historical median - as it is now, as you can see from the accompanying chart - the odds of a recession within the subsequent 12 months are three times higher than when the spread is below the median.

A large spread between the CCI and the UMI means that consumers are confident about the U.S. economy in general more than they are about their own finances. Analysts who focus only on the more upbeat CCI are overlooking the valuable information contained in the UMI, according to Joanne Hsu, the director of the University of Michigan survey.

Hsu says she is "confident" that consumers are providing an early warning of an economic downturn. In a recent interview with Bloomberg, Hsu said that "rather than only basing their outlooks on news or government data, consumers absorb a gut sense of the economy while going about their days - shopping for groceries, gossiping at work, paying bills... Even if you discount the accuracy of regular people's predictions, ... they're still telling you something important."

Consumer sentiment and the stock market

The CCI-UMI spread also provides a warning signal for imminent stock-market trouble, which is not surprising since corporate profits typically fall in a recession. This early warning signal is illustrated in the accompanying chart, which plots the S&P 500's SPX annualized real total return since 1979. The chart shows the stock market performing far worse when the spread is extremely wide.

The current CCI-UMI spread is in the top decile of its historical distribution, which means it falls in the category associated with the blue columns in the chart. The S&P 500 dropped close to 20% over the six weeks subsequent to my late-February column that focused on the spread, when it also was in the top decile.

It would be a stretch to predict another market downturn based on the current consumer readings. The CCI-UMI spread is not a short-term market-timing tool; its explanatory power is greatest at the several-year horizon. Nonetheless, the large current CCI-UMI spread is yet one more indication that stocks will likely face stiff headwinds in coming weeks and months.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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July 12, 2025 15:00 ET (19:00 GMT)

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