Recession fears are again on the rise, with the vast majority of chief financial officers bracing for an economic downturn in 2020—and historical data shows that trends of declining optimism among America’s financial executives can sometimes be a harbinger for looming market sell-offs.
Recession fears are back in full force: 97% of CFOs said that an economic downturn has already begun or will begin in 2020—up from 88% who said the same thing last year, according to Deloitte’s latest CFO Signals Survey.
Many on Wall Street primarily use CFO sentiment as an indicator of the business environment, but deteriorating forecasts can sometimes help warn of looming market downturns, historical data shows.
Going into 2019, for example, just 28% of CFOs said they expected the North American economy to improve—half the number it was a year earlier, in 2018. That statistic fell to 24% in the following quarter, right before the S&P 500 dropped almost 7% in May and again by nearly 6% from mid-July to August.
Business optimism also notably declined before the big December 2018 market sell-off, when the S&P 500 shed over 9%: Over two thirds of CFOs warned that the U.S. market was overvalued, and a metric of their forward-looking optimism hit a two-year low.
Before the market lost almost 10% in the third quarter of 2015, some CFO growth expectations hit their lowest levels in five years, reflecting rising concern ahead of the sell-off. The S&P 500 also fell by 5% in the first month of 2016—in Deloitte’s prior outlooks, CFO optimism had been steadily on the decline.
Going further back, CFO sentiment was also relatively accurate in warning of the 2008 financial crisis: According to Duke’s CFO Global Business Outlook, optimism had plunged to a record low by September 2017—with pessimistic CFOs outnumbering optimists by around four to one.
What to watch for: It’s important to remember that CFO sentiment, which helps give insight into business and consumer spending, is primarily an indicator of economic activity—rather than stock market behavior.
Crucial quote: “While as a stand-alone they don’t offer much insight, it’s most helpful to look at these surveys hand-in-hand with hard economic data,” says Mark Freeman, chief investment officer at Socorro Asset Management. “What really matters is the extent to which sentiment potentially translates into CFO behavior—that has earnings implications, and that does matter to the market from a fundamental standpoint.”
Tangent: Nearly two thirds of CFOs surveyed by Deloitte said that U.S. economic performance beyond 2020 will “depend substantially” on the outcome of the elections, while trade policy remains CFOs’ “most worrisome external risk.” Respondents also cited falling expectations for two key measures of the economy: Consumer sentiment, which has largely held steady so far, and business spending, expectations for which hit a three-year low. More than 80% of CFOs also said they had already taken at least one defensive action to mitigate against a potential downturn, as evidenced by their growing focus on cost reduction and returning cash.