How Long Will This Expansion Last?

June 20, 2018

image of clock

Living to age 100 used to be rare, but now many people celebrate that milestone. The same could be said for the economy: This expansion has surpassed 100 consecutive months of economic growth and is closing in on the two that have lasted longer. Tax cuts, job growth, synchronized and improving global growth, and a patient Federal Reserve (Fed) are all helping extend the positive outlook for the economy and markets. Even if market volatility picks up, this long but moderate economic expansion that began in June 2009 has fuel to go further, which is good news for investors.

Economic and earnings growth are the pillars that support rising stock prices over time. Most of the time, the economy grows, occasionally interrupted by recessions. Historically, there have been five months of expansion for every month of recession.

Length of Economic Expansions

Source: National Bureau of Economic Research.

The chart shows the length of each expansion since 1924 and suggests they may be getting longer. Although past performance does not guarantee future results, the two longest expansions were also accompanied by strong stock markets. The S&P 500 return, including dividends, averaged 14.7% annually during the 120-month expansion from 1991 to 1999 and 8.0% during the 106-month expansion between 1961 and 1969.

Fuel for further growth

The pace of economic growth picked up to about 2.5% in 2017, modestly better than its 2.1% average rate during this expansion. You may be wondering when it will end, especially since bear markets (stock market declines of 20% or more) frequently accompany recessions. We think there’s plenty of life left in this expansion due to five main sources of continuing growth:

  1. Tax cuts The recent tax cuts are likely to spur slightly faster economic growth this year as businesses and consumers alike can ramp up their spending. Concerns about rising federal budget deficits are likely to be addressed eventually rather than immediately.
  2. Job growth – The still-solid job market with slow wage increases and low inflation suggests the expansion continues, since improvements in the job market tend to lag other indicators.
  3. Cyclical upswing – Manufacturing, housing and vehicle sales are strong, showing the more cyclical parts of the economy are growing solidly.
  4. Synchronized global growth – Helped by expansionary monetary policies, improving economic growth in Europe, Japan and much of the rest of the world can spur U.S. exports and help keep markets calm.
  5. Patient Fed – Low inflation has allowed the Fed to keep monetary policy expansionary and raise short-term interest rates slowly.

Expansions don't die of old age

The repeated pattern of expansions and recessions is like multiple sequels in a long-running movie franchise – each film shares a similar and familiar landscape but still manages to be different due to the specific causes and characters. And like every great action film, recessions usually start with an unexpected shock. That’s why recessions – and the bear markets that accompany them – are nearly impossible to predict. Fortunately, most economic indicators are positive, including our main sources of short-term growth. Here are a few of the key recession indicators we watch, none of which is flashing a warning:

  • Recessions have usually followed an inverted yield curve, when short-term interest rates are higher than long-term rates. This is not the situation today – in addition, financial conditions continue to be expansionary.
  • The Leading Economic Indicators and the Purchasing Managers Index continue to show expansion ahead.
  • The rebound in oil prices hasn’t been enough to dent consumer confidence, and while there are signs of froth in some markets, we don’t see any significant bubbles ready to burst.

Is your portfolio prepared?

We don’t expect a party if this expansion becomes the second-longest, but it’s a good reminder to review your investments with your financial advisor to ensure they include appropriate allocations to bonds and international equity investments as well as U.S. stocks. You may need to rebalance to return to the appropriate mix of investments based on your comfort with risk and long-term financial goals.

This long-lasting expansion with continued earnings growth can support rising stock prices over time, even with the possibility of higher volatility in 2018. That’s why we think pullbacks can offer opportunities to add stocks at lower prices.

Important Information:

Past performance is not a guarantee of future results. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

More Resources:

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