The chief market strategist at $1.3 trillion investing giant reveals the hidden red flag that can signal a recession months in advance
- Quincy Krosby, the chief market strategist at $1.4 trillion Prudential Financial, lays out an overlooked economic signal that's historically flashed red months before a full-blown recession occurs.
- While Krosby isn't calling for an imminent meltdown, she lays out three other signals she's also watching closely.
Investors use revenue as a way to judge individual companies. But if they want to get the full picture, they could also use it as a way to check the economy's health.
Quincy Krosby, the chief market strategist at $1.4 trillion Prudential Financial, says corporate revenue can provide a clear picture of how where the economy is headed. When multiple industries say their sales growth is slowing, she says investors should watch out.
"When you see revenue growth coming down in a material way from one sector to another sector to another sector, over, say, two quarters or three quarters, what companies do in real life is they stop spending, they cut costs," Krosby told Business Insider by phone. "They ultimately fire people. They don't wait that long."
Krosby doesn't think that kind of revenue slump is imminent. But she says those declines can reveal economic weakness six months or more before the job cuts are measured in the government's unemployment data.
And the effects of that kind of weakness can be severe: When people lose their jobs, or become fearful they're going to be laid off soon, they spend less money. That can substantially weaken the economy because consumer spending comprises about 70% of the US GDP.
In the end, spotting economic trouble sooner gives investors more time to prepare for a downturn. And it ultimately allows them to be better preared if a full-blown recession strikes.
As of right now, most experts think the US economy is slowing, and revenue projections bear that out. While Refinitiv data shows S&P 500 sales growth hit a seven-year high of 8.4% in 2018, analysts think that growth will cool off to a 4.4% pace this year.
In fact, calls for an imminent recession have gotten louder across Wall Street in recent months. And while Krosby doesn't see any immediate danger brewing, she's closely watching revenue growth, as well as these three other potential warning signs:
1) A drop in new orders
Purchasing Managers' Indexes are measurements of how manufacturing and service companies around the world are performing. Krosby said that their measurements of new orders are especially important, as a sustained drop in orders is a sign of weakness and greater difficulties ahead.
2) A strong dollar
If demand slows down and the dollar stays strong, US multinationals can get hammered, Krosby explains. That's because the stronger dollar makes their products more expensive in overseas markets.
3) Falling transportation stocks
Transports are a traditional measurement of economic health, and Krosby says they're a sensible one: If the companies start struggling because they're shipping fewer goods, the economy may be in trouble.