Fortifying Portfolios: The LEI’s Plunge Signals Time to Shift to Defensives

The US Leading Economic Index (LEI) has plunged to its lowest level in years, raising urgent questions about a potential recession. Investors must act swiftly to rotate into defensive sectors like utilities, healthcare, and dividend stalwarts while reducing exposure to cyclical industries. This is not merely a theoretical concern—the LEI’s April 2025 decline of 1.0% marked its steepest drop since March 2023, driven by deteriorating manufacturing, labor markets, and consumer confidence. Here’s why history and data demand immediate action.

The LEI’s Warning: A Recession on the Horizon?

The LEI’s two-month decline—from 100.5 in March to 99.4 in April—reflects deepening economic fragility. Three critical components are flashing red:
1. Manufacturing New Orders: Softening demand signals a slowdown in industrial activity, a key driver of GDP.
2. Consumer Expectations: Plummeting to multi-year lows as trade wars and inflation erode confidence.
3. Stock Prices: The S&P 500’s largest monthly drop since September 2022 underscores market anxiety.

The Conference Board revised its 2025 GDP forecast to 1.6%, citing trade wars as a major headwind. While the LEI’s six-month decline of -2.0% has not yet met the -4.2% “recession threshold,” its diffusion index (tracking component weakness) has fallen below 50—a warning sign of broadening economic stress.

History Repeats: Defensive Sectors Shined in Past Downturns

During the 2001 and 2008 recessions, defensive sectors proved their mettle:
- 2001 Recession: Consumer staples and healthcare held up far better than tech and telecom, which lost over 75% of their value.
- 2008 Crisis: Consumer staples were the only sector to limit losses to 26%, while financials and industrials collapsed by over 40%.

The LEI’s predictive power has consistently guided sector rotations:
- Pre-2001: Declines in consumer expectations and stock prices signaled the tech bubble’s end, prompting a shift to defensive stocks.
- Pre-2008: The LEI’s sharp decline in late 2006 warned of the housing crash, favoring utilities and healthcare as housing and financials imploded.

Now Is the Time to Rotate: Here’s How

The current LEI’s trajectory mirrors pre-recession signals from 2001 and 2008, but with a critical difference—investors have more time to act. The diffusion index’s decline has just begun, and the six-month LEI trend is still above -4.2%. This creates a window to fortify portfolios before a potential downturn.

Top Defensive Plays

1. Utilities (XLU):
2. Steady dividend yields (avg. 3.2%) and low correlation to economic cycles.
3. Outperformed the S&P 500 by 8% since March 2025 as the LEI weakened.

5. Healthcare (XLV):

6. Essential demand for pharmaceuticals and services insulates this sector from economic swings.
7. Historically outperforms during recessions, with 2008 TRS losses of just 26% versus the S&P’s 50%.

8. Current valuations are 15% below their 10-year average.

9. High-Quality Dividend Stocks:

10. Firms like Coca-Cola (KO), Procter & Gamble (PG), and Johnson & Johnson (JNJ) offer stable cash flows.

Sectors to Avoid

• Cyclical Industries:
• Technology (XLK): Exposed to trade wars and slowing enterprise spending.
• Industrials (XLI): Manufacturing weakness will hit earnings, as seen in March’s new orders decline.
• Energy (XLE): Volatile commodity prices and geopolitical risks cloud prospects.

The Recession Timing Debate: Why Act Now?

Bullish arguments claim the LEI’s decline is “not yet severe enough” for a recession. But this ignores two key points:
1. Lagging Indicators: The Coincident Index (CEI) still shows moderate growth, but its six-month trend (+1.1%) is slowing. Lagging indicators like labor costs (part of the LAG index) are stabilizing, but not accelerating.
2. Policy Overhang: Trade wars and Federal Reserve rate cuts (if implemented) could delay a recession—but they won’t stop it. The Conference Board’s 1.6% GDP forecast implies subpar growth, not recovery.

Final Call to Action: Rotate Now

The LEI’s decline is a clarion call to rebalance portfolios:
- Reduce exposure to cyclical sectors: Tech, industrials, and energy face headwinds from trade wars and slowing demand.
- Build defensive bulwarks: Utilities, healthcare, and dividend stocks offer stability and income.
- Monitor the diffusion index: If it stays below 50 for three months, accelerate defensive allocations.

History shows that waiting until a recession is “officially declared” is a losing strategy. In 2008, investors who acted when the LEI first dipped below its prior peak outperformed by 20% over the next 12 months.

The writing is on the wall: the US economy is slowing, and defensive sectors are the safest harbors. Act now—before the storm hits.

Data as of May 16, 2025. Past performance does not guarantee future results.