America's Longest Expansion
It is July 2019 and it is now official: the current US economic expansion is the longest on record, turning 10 years old this month. Despite the record, this expansion is also one of the most hated with pundits calling for a top at multiple points along the last 10 years, including significant scares in 2012 and 2016. To be sure, many are still scarred by the 2008 market drop and along with each market high wonder “when the next big one hit”. The truth is that no one really knows, but there are several factors at play that have allowed this expansion to go on so long and may allow it to continue.
No boom no bust
Perhaps it is precisely the skepticism that remains in the market that allows the expansion to continue. In typical market expansions market optimism leads to overinvestment, which leads to high debt levels and high prices (or bubbles) that result in market crashes and recessions (Think 2008 housing crisis or 1999 Tech Bubble). The current expansion has not followed this typical boom cycle. In fact, the current expansion could be characterized as a long, slow slog of meager growth that has simply continued year after year. Real GDP is up 25% from the second quarter of 2009 through the first quarter of 2019, which is the second worst decade since 1950 despite having no recessions. Arguably, there has simply not the same type of market excesses in the current cycle that we have seen in previous recoveries.
Accomodative Federal Reserve
Chairman Powell’s comments on expected interest rate increases sent the market into a tailspin last fall. He quickly reversed course, and the Federal Reserve is current signaling a halt to interest rate increases if not an interest rate decrease in 2019. It is somewhat amazing that the Federal Reserve would be discussing lowering interest rates, a move that would stimulate the economy, when unemployment sits at 3.7%. Perhaps the Federal Reserve is also scarred from 2008 because the current expansion is still seen as weak. For those of us who would like the expansion to continue, an accommodative Federal Reserve is good news, lowering the risk that the Federal Reserve will put the brakes on the economy and bring a recession.
We are not saying that there are not risks to the current expansion. As we have written in the past, the current trade war between the US and China is a potential source of disruption, as is the current geopolitical clash between the US and Iran. Perhaps it will be the 2020 election, or some other unforeseen event. We do not know that will derail this longest expansion in US history, and it is important to stay diversified and appropriately defensive. Yet, absent an unforeseen event, the apparent lack of bubbles, and the accommodative Federal Reserve lay the groundwork for the expansion to continue a little while longer.