FIVE FORECASTERS: FEW WARNING SIGNS
John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial
Our favorite leading indicators are signaling that further economic growth and stock market gains lie ahead. With the bull market celebrating its ninth birthday on March 9, we looked at some of our preferred leading economic and bull market indicators. We included LPL Research’s proprietary “Over Index” and two of the Five Forecasters (the Conference Board’s Leading Economic Index and stock market breadth), in an effort to help assess the likelihood that the bull market will reach its tenth birthday in a year. This week, we will look at the remaining three forecasters: the Treasury yield curve, the Institute for Supply Management (ISM) Manufacturing Index, and stock valuations. Historically, these indicators—which are summarized in our Recession Watch Dashboard—have collectively signaled a transition to the latter stages of the economic cycle and an increased potential of an oncoming recession and bear market.
TREASURY YIELD CURVE: NO WARNING
Bull markets have historically ended (and bear markets have begun) when the Federal Reserve (Fed) has pushed short-term interest rates above long-term rates, which is often referred to as “inverting the yield curve.” For example, the S&P 500 Index peaked in 2000 and 2007 when the 3-month to 10-year Treasury yield curve was inverted by about 0.5% (3-month Treasury yields were roughly 0.5% above the yield on the 10-year Treasury note). The yield curve is considered one of the most reliable leading indicators because every recession over the past 50 years has been preceded by the Fed hiking rates enough to invert the yield curve—7 out of 7 times. The yield curve inversion usually takes place about 12 months before the start of a recession, but lead times vary, ranging from about 5–16 months...