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. More recently growth has slowed and the Fed has been cutting rates. The main risk now appears to be that the economy will simply continue slowing until a recession begins.

What’s new?

The US and China have made progress in trade negotiations. The increase in US tariffs from 25% to 30% scheduled for 15 October was postponed, and China has resumed purchases of US agricultural products. Negotiations on completing a “Phase 1” deal continue with the aim of President Trump and President Xi signing an agreement when they meet at the November APEC summit. Economic data in recent weeks has mostly surprised to the downside; we believe that noise in the data is at least partially responsible for this after stronger data in previous weeks. Consumer spending continues to be the main engine of growth, while business investment is soft. Job growth has slowed but is still strong enough to keep the labor market tight. The ISM manufacturing PMI fell further below 50 in September. Housing data suggests that lower mortgage rates are providing a boost. We lower our growth indicator to slightly below neutral. The yield curve has moved out of inversion, with 10-year Treasury yields back above 3-month yields. Inflation data has been stronger in recent months. Credit spreads on corporate bonds are fairly tight. The Fed cut rates by 25 basis points (bps) in both July and September. The market is pricing in a high probability of another cut at the next FOMC meeting on 30 October.

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.