It’s been a record week for the S&P 500, which became the longest bull market recorded on Wednesday when it turned 3,453 days old, but all good things must come to an end and Mark Tepper, president and CEO of Strategic Wealth Partners, gave investors three warning signs that they should take their profits and run.
An inverted yield curve, a year-over-year change of the Leading Economic Index and the tightening of monetary policy have produced a hat trick that correctly predicted the last seven recessions.
“Put all three indicators together and they’ve correctly predicted the last seven recessions with not a single false positive,” said Tepper. “We feel positive that there’s at least one year of runway left before they go negative.”
An Inverted Yield Curve
An inverted yield curve is a common indicator thrown around in the bond markets, but nonetheless, it’s a strong determinant to a recession. The inverted yield curve occurs when the yield for long-term debt issues are lower than those of short-term debt issues of the same grade.
“Right now the yield curve is flat, but is not yet inverted,” said Tepper. “As a standalone indicator, that one is typically premature and it signals a recession 12 months too early.”
Year-Over-Year Change of Leading Economic Index
The Conference Board Leading Economic Index (LEI) is an economic leading indicator that forecasts the future of economic activity. The indicator is calculated by The Conference Board, a non-governmental organization that determines the value of the index based on ten key variables:
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- ISM® Index of New Orders
- Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less federal funds
- Average consumer expectations for business conditions
“When it contracts year-over-year, a recession usually follows,” Tepper said.
Tightening of Monetary Policy
When the Federal Reserve uses a tight monetary policy, the intent is to slow down the rate of economic growth. Tightening of monetary policy constricts spending when the economy appears to be accelerating too quickly or to curb inflation if it is rising too rapidly.