It’s been a record week for the markets as the S&P 500 notched a fresh intraday high for the first time since January and entered its longest bull run in history. But as concerns of an overheated market and rising geopolitical tensions escalate, one investor is watching three indicators that could derail the rally.
— The first indicator is an inverted yield curve. This correctly predicted the last seven recessions since 1968. It typically “flashes red” by inverting 12 months before the beginning of a recession. Right now the yield curve is pretty flat, but not yet inverted.
— Second, is the year-over-year change of the Leading Economic Index, which predicts future global economic movements. When it contracts, a recession usually follows. Currently, the index is still growing at 5 percent year over year, so there’s no immediate need for concern.
— Last is the tightening of monetary policy. Although the Fed is intent on raising rates, policy tightening shouldn’t be expected for at least another year.
Put all three indicators together and they have correctly predicted the last seven recessions with not a single false positive. At this point, there still appears to be one year of runway before these three red flags hit stocks. When the convergence happens, switch your position to underweight stocks, but right now maintain your stock portfolios and ride out the rest of this bull market.
Bottom line: The three biggest recession indicators are not showing warning signs just yet, so continue to ride the bull market for at least a year.