Bull market monitor

Equity bull markets rarely end in the absence of a recession occurring, which is why we track key attributes of the business cycle to gauge how the expansion is evolving and calculate the risks of a recession.

Cycle status

We think that the US business cycle has transitioned to the late stage. Growth decelerating from its peak toward long-term potential and Fed monetary policy being roughly neutral are the two characteristics typical of a late-cycle economy. The good news is that the economy can be late cycle for a long time. Last year, our main concern was that the economy would overheat, forcing the Fed to tighten monetary policy and causing the cycle to end. However, growth has slowed more recently and the main risk now appears to be that the economy will simply continue slowing until a recession begins.

What’s new?

Trade negotiations between the US and China have resumed and a few small steps have been taken to deescalate the dispute, raising hopes that at least a partial deal can be reached. Economic data in recent weeks has mostly surprised to the upside. Consumer spending continues to be the main engine of growth. Job growth has slowed but is still strong enough to keep the labor market tight. The ISM manufacturing PMI fell below 50 in August, but hard data on manufacturing output showed a rise. Housing data has strengthened across the board, suggesting that lower mortgage rates are providing a boost. We keep our growth indicator at neutral. The yield curve is inverted, with long-term Treasury yields below short-term yields. In the past, this has been a reliable indicator that a recession is on the way, but we expect this time to be different. Recent inflation data has been stronger. Credit spreads on corporate bonds are fairly tight. The Fed cut rates by 25 basis points (bps) on 18 September and the market is pricing in about a 75% chance of another cut by the end of the year.

What are we watching?

We are focusing on signs that business demand for labor is slowing, as this could undermine the outlook for consumer spending and increase the risk of recession. In addition to the US-China trade dispute, a decision on auto tariffs should be made by November. Overseas, we are keeping an eye on both slowing growth and political issues with the potential to rattle markets.

What are the investment implications?

Risks for the economy are skewed to the downside. We remain underweight equities in our tactical asset allocation.

Key cycle indicators

The cycle indicators gauge whether the economy is overheating and if financial conditions are restricting growth. These determine our assessment of where we are in the cycle.

Overall: Late cycle


Overheating indicators

Growth (relative to potential)

Labor market

Inflation (relative to 2%)


Financial indicators

Monetary policy

Yield curve

Credit conditions

Each indicator is evaluated relative to a neutral level that is sustainable over time in order to determine whether the economy is at risk of overheating or if financial conditions will start to restrict growth.