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The yield curve bear signal has now lapsed, and this is a great opportunity to revise the bull-bear market leading indicator to improve its responsiveness. The Bull-Bear Leading Index is now stripped down to a composite of five separate indicators, which collectively signal a mild bear market:
Yield Curve
The 10-year/3-month Treasury yield curve has reliably inverted before every recession since 1960, with two exceptions:
- In 1966, the yield curve inverted, the S&P 500 fell 22%, and the NBER declared a recession. However, the NBER later changed its mind and airbrushed the recession from its history.
- A steep yield curve inversion took place, lasting from November 2022 to November 2024. The Fed hiked interest rates steeply in 2022 after keeping the fed funds target rate (lower bound) at zero for almost two years during the COVID-19 pandemic. However, Treasury Secretary Janet Yellen increased the issue of T-Bills, flooding financial markets with liquidity to counter the effect of rate tightening, and the Fed ran down its reverse repo facility, injecting more than $2 trillion to achieve the same ends.
The 10-year/3-month yield curve dipped below zero in April 2025, which extended the risk-off signal until April 2026, 12 months later. We have now reduced the maximum lag to 120 working days: the signal will revert to risk-on if the spread has been positive for more than 120 days and the S&P 500 closes above its 12-month weighted moving average.
Fed Rate Cut Cycle
The interest rate cycle indicates whether the Fed perceives the economy as expanding or contracting. A declining fed funds target rate is a leading indicator, signaling risk-off, while rising rates signal risk-on. We have again reduced the lag: if the fed funds rate is not cut within 75 calendar days, the signal now reverts to risk-on.
Transport Activity
The Cass Freight Shipments Index highlights broad activity levels in the economy. A rise or fall of more than 3 basis points signals risk-on or risk-off, respectively.
Heavy Truck Sales
Heavy truck sales reflect the transportation industry’s confidence in the economic outlook. The 12-month average of units sold plunged to 32.8K in April 2026. The fall of more than 10% below its preceding peak signals risk-off.
Employment in Cyclical Sectors
Employment in cyclical sectors is a leading indicator, and typically accounts for the majority of job losses during a recession. Combined employment in the Manufacturing, Construction, and Transportation & Warehousing sectors has declined by 200K from its preceding peak of 27.671 million in September 2024. A decline of more than 300K would signal risk-off, while a rise of 500K from the preceding trough would signal risk-on.
Past Performance
Our test of the new format indicator shows improved responsiveness, using the S&P 500 Total Return Index as the benchmark. An investment of $100,000 invested in the S&P 500 index in January 1990 would have accumulated to $4.1 million by April 2026, but underperforms relative to a strategy that switches to AA-grade corporate bonds as the Bull-Bear Indicator risk-off signal increases. A strategy that reduces exposure to the S&P 500 and increases weighting in AA bonds relative to the risk-off percentage would have reached $5.7 million by April 2026.
However, a strategy that switches to Gold instead of AA corporate bonds would have accumulated to $15.3 million over the same period.
The portfolio is invested 100% in the S&P 500 index if risk-off is at zero, and the weighting is reduced as the risk-off measure rises. A risk-off reading of 40%, for example, would be weighted 60% to the S&P 500 and 40% to Gold, while 100% risk-off would be fully invested in Gold.
Conclusion
Past performance does not guarantee future performance, but the above indicators provide a useful guide to market sentiment.
Acknowledgments
- Prof. Robert Shiller: CAPE 10 Data
- S&P Global: S&P 500 Sales and Earnings Estimates
- Federal Reserve of St Louis: FRED Data
- Bureau for Economic Analysis: Motor Vehicles Data
- Morningstar: Dow Jones Industrial Average Statistics