How far are we from the end of this cycle? When will the next recession arrive and more importantly when will stocks and other markets start to anticipate a slowdown? These are critical questions for investors and ones that can't be answered with a high degree of certainty. History may not repeat but is said to rhyme so probably the best we can do is look to the past for a clue about the future.
The yield curve is often cited as the best recession indicator and we agree with that assessment. But it is easy to misinterpret and most people do. Everyone knows the yield curve inverts prior to recession – or at least it has for a long time – but the lag time can be considerable. In the last cycle the 10/2 curve first inverted in February of 2006 a full 18 months prior to the official onset of recession. The S&P 500 still had 21% more upside at that point. In the 90s the curve first inverted in June of 1998, almost three years – and over 30% in gains for the S&P 500 – before recession.
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