The ultimate signal for investors looking for the next recession is the yield curve. The chart below shows the difference between the 30 year yield and the 5 year yield. At the pace the yield curve is flattening, it will be inverted by August or September. To be clear, you can't just extrapolate current moves onto future moves because that leads to crazy results. If you extrapolated the January increase onto the rest of the year, stocks would've been up over 65% which is almost impossible. The point of this chart is to show what the yield curve would do ‘all else being equal.' If inflation and growth increases in Q2 like I expect, the 10 year yield and the 30 year yield can increase a bit. That would delay an inversion by a few months. There's usually a lead time of one year before a recession occurs. I will undoubtedly get into the specifics of how long the lead time will be after an inversion occurs.

We're certainly at a weird point in the cycle because nothing indicates a recession is coming in the next 18 months. The capex expansion by S&P 500 firms and the expected increase in GDP growth make it look like a new leg of the expansion is coming. Furthermore, the muted inflation rate and slow Fed hike cycle mean a recession won't be catalyzed soon. In 2008, oil prices peaked at $147 making the current price jump to the $70 level seem inconsequential.

Leading Index Is Improving

In keeping with my point that the economy is not looking like a recession is around the corner, the weekly leading index from the ECRI report shows growth will be ticking up as it is now at 4.5%. I'm looking for the spike in growth in January to eventually translate to an increase in GDP growth in the next few months. The latest improvement in this index signals the second half of the year leading into the beginning of 2019 will have solid growth as well. It's constructive to see the downtrend, which was emerging in the past couple months, has reversed.