As a Result of This Early Warning Indicator, the Stock Market is More Likely to Enter Into a Recession

The likelihood of a U.S. recession starting within the next 12 months has risen considerably, with current estimates placing the odds at around 20%. This heightened probability is based on a noticeable gap between two key consumer indicators: the Conference Board’s Consumer Confidence Index (CCI) and the University of Michigan’s Consumer Sentiment Index (UMI). While a one-in-five chance may not seem particularly high at first glance, it actually represents an unusually elevated risk when compared to historical standards.

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The relationship between these two indexes offers valuable insight. When the difference—or spread—between the CCI and UMI is larger than the historical median, the odds of a recession occurring within the following year triple. At present, the spread is well above that median level, indicating that economic trouble may be brewing beneath the surface.

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The core difference between these two surveys lies in their focus. The CCI measures how consumers feel about the broader economy, such as business and labor market conditions. The UMI, however, is more focused on how consumers view their personal financial situations.

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A wide gap between the two—when consumers feel upbeat about the general economy but pessimistic about their own finances—can be a red flag. It suggests that optimism about the economy may be superficial or overly influenced by headlines, while day-to-day financial struggles persist.

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Joanne Hsu, director of the University of Michigan’s survey, believes the UMI is sounding a critical warning. In a recent interview with Bloomberg, she emphasized the importance of listening to what consumers are communicating through their sentiment.

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Hsu explained that consumers often base their economic outlooks not just on news reports or official data, but also on everyday experiences—such as shopping for groceries, paying bills, or chatting with coworkers. These lived experiences, she argues, can act as an early detection system for downturns.

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Even if one questions the predictive power of ordinary consumers, Hsu insists their sentiment offers meaningful clues about underlying economic health. People may not follow every financial metric, but they respond instinctively to rising costs, tighter budgets, and job insecurity—factors that can signal economic strain long before official reports confirm it.

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Beyond economic forecasting, the gap between the CCI and UMI also has implications for the stock market. Historically, a wide spread between the two indexes has preceded poor performance in equities. This is logical, as recessions tend to hurt corporate earnings, which in turn pressures stock prices.

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A long-term chart plotting the S&P 500’s inflation-adjusted annualized returns since 1979 reveals a clear pattern: when the CCI-UMI spread is especially wide, stock returns are notably worse. In fact, the current spread ranks in the top 10% of its historical range—placing it in the same zone that previously correlated with substantial market declines.

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Back in February, when the spread was also in this highest decile, the S&P 500 fell nearly 20% over the following six weeks. While it's not accurate to assume a similar drop is imminent now, the spread’s current level is yet another sign that the market may face challenges ahead. It’s important to note, though, that this indicator isn’t designed for short-term trading. Its real strength lies in forecasting economic and market trends over several years, rather than weeks or months.

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Nonetheless, investors should be cautious. The persistent and unusually wide spread between the CCI and UMI points to a disconnect between how Americans view the overall economy versus their personal financial realities.

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This divergence often signals a fragile economic environment—one that might not yet be visible in headline statistics or corporate earnings reports but is already being felt by households.

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In summary, while a 20% chance of recession may not sound like a certainty, the underlying data driving that figure is worth paying attention to. The divergence between consumer confidence and sentiment has historically been a reliable early indicator of both economic downturns and equity market turbulence.

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Combined with the already heightened concerns about inflation, interest rates, and geopolitical tensions, this spread is a critical warning signal investors and policymakers would be wise not to ignore.

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