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As The US Economic Expansion Turns 10 Years Old, The S&P 500 Hits All Time Highs. What's Next?

As financial advisors, when markets go on strong runs like the one we’ve seen since Christmas, we often get questions about what’s going to happen next.  Clients call us, their investment managers, and want to know whether to keep buying and join the party, or whether profit taking and rebalancing is sensible.  And there are good reasons to wonder, as an unusual set of economic conditions have come together at present.  As of this month, we are now living in the longest economic expansion in U.S. history, beginning its 11th year.  As I write this, the S&P 500 has just closed at another record high.  Job creation in the US rang in at 224,000 new positions for June, well above the monthly average for 2019, and more than double the rate required to absorb new entrants to the labor pool.  One might be forgiven for supposing things were about to overheat, leading to recession.  Often, as economic expansions get long in the tooth, signs of imminent recession abound.  And while there are some negative signals, such as a yield curve that’s inverted, and downward moving indices of business confidence, other leading indicators suggest the expansion could continue for some time.  For example, inflation and median wage growth, both of which have historically bubbled up ahead of downward moves in GDP, are muted.  Industrial output and retail sales are also still moving up.

Might things be different somehow, this time around?  After all, just because this recovery is long according to the calendar, that isn’t a reason for it to end.  A couple of interesting notes: the current expansion has been the most sluggish recovery in the past 70 years.  Real GDP growth has averaged just 2.3% per year during this expansion, compared to a median growth rate of 4.4% per year for the prior 11 expansions.  According to The Economist, structural changes in the US economy toward services and less tangible assets may mean that it has also become less volatile.  Investment shifting relatively away from manufacturing equipment and real estate toward intellectual property may make the economy less sensitive to historic triggers of recessions such as industrial slumps or oil shocks.  There are few signs of past demons such as housing bubbles or precarious bank balance sheets.  That, along with the stable inflation conditions currently in place, may suggest that the economy can grow, although less explosively, for longer without enduring a recession.  Perhaps it can go through a period of slowing without tipping into recession and enter into a growth cycle again.

With that aforementioned slowdown in growth visible in some sectors and geographies globally, the markets are now anticipating that the Federal Reserve will more than likely lower interest rates at its late July meeting, and perhaps once more before the end of the year.  This pivot in policy by the FED and lower-for-longer interest rates environment could add some extra innings to this domestic economic expansion.  This economic cycle could continue for two or three more years assuming the trade and tariff wars don’t escalate (that’s a big assumption) or other government policies or lack of policies don’t trigger recession.

As Mike Genovese puts it, our team of investment managers don’t believe we have any unique insight or edge versus the consensus in assessing these events on a day-to-day basis.  New information is continuously reflected in financial asset prices.  Nor do we attempt to make gains by market timing or making one-way investments that depend on a particular short-term outcome going our way.  We do the best we can to position our clients to take advantage of the forces moving the market over the medium to long-term, at the lowest level of risk we can take on while still meeting their goals.  We also work hard to position our portfolios both to generate reasonable returns over the medium-term while still maintaining resilience across a range of potential negative or volatile shorter-term scenarios.

But above all, we invest the time to understand our clients’ tolerance for risk and their long-term goals, and set them up in a tailored investment portfolio to match.  Then, we remind them that volatility is a normal part of market behavior, and it’s necessary to realize gains over longer periods of time.  It’s also one of the reasons we stay disciplined in diversifying client portfolios across asset types and geographies.  We help them stay patient and keep their emotions out of investment decisions.  We think that’s one of the best reasons to hire a financial advisor in the first place.

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