Merk Research: U.S. Business Cycle -- recession??

Analysis: Over the 90 years between 1927 and 2017, the average S&P 500 monthly return during expansions was +0.89% (889 months), compared to an average S&P 500 monthly return during recessions of -0.71% (191 months). In terms of proportions of time: expansion months account for about 80% and recession months about 20%. The business cycle also has important implications for Fed policy. *Note that recessions are not announced by the NBER until well after their start dates*

Analysis: Since last month’s report the LEI YoY rate of change decreased: from +5.9 to +5.2. The momentum has slowed somewhat, but given that the YoY rate of change remains positive, history suggests a recession is unlikely to start within the next six months. Chart Framework: I’d get incrementally negative on the business cycle outlook if the LEI YoY went negative.

Analysis: The yield curve is still positively sloped, meaning the 10yr yield is higher than the 3yr yield. The yield curve has steepened somewhat since last month’s report, but in general the flattening trend continues and the curve may invert in the coming months. Chart Framework: I’d get incrementally negative on the medium term business cycle outlook if the yield curve inverted (i.e., 3yr yield > 10yr yield).

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