Assuming the US economy is still expanding as we write this, the recovery from the Great Recession is the longest economic expansion on record in the US at 10 years and 1 month, or 121 months. This expansion eclipses the previous record from the 1990’s, which ran 120 months. The current expansion is unusual in two ways: its length, and its rather modest pace of growth. We have noted an uptick in commentary around the expansion and wanted to share our take. We think these two charts are particularly helpful in understanding the expansion and framing the discussion.
The Current Economic Expansion Is Now the Longest in US History
Source: National Bureau of Economic Research, Goldman Sachs Global Investment Research
However, The Pace of Growth has Lagged Other Expansions
Source: National Bureau of Economic Research, BEA, JP Morgan Asset Management *Chart assumes current expansion started in July 2009 and continued through June 2019.
The length of the current expansion has many commentators looking to call the top, or a downturn, in the economy. Additionally, we have the Fed positioning itself for an “insurance” rate cut. With all that going on, it is natural to ask the question: is a downturn coming and if so, how bad could it be?
The most intellectually honest answer is that there will be a downturn one day, but no one knows for sure when it is coming or how bad it will be. In terms of data, the length of the current expansion is not all that informative in evaluating the current environment, but the strength of the growth over the last decade may provide some helpful context. Our current expansion, while long, has not been all that strong when compared to past expansions. The second graph from JP Morgan is particularly instructive, the economy has taken 10 years to experience a gain in real GDP that has previously taken less than 5 years in more normal recoveries.
So what do we think?
We tend to think that busts are born out of the excesses of a boom. Excessive confidence leads to excessive risk taking in the economy and in markets, this leaves an economy vulnerable to setbacks and the excesses tend to get washed out in a bust. The previous bust was longer than average and a bit deeper, leaving many participants chastened. The risk appetite of investors over the cycle has been lower, and in our opinion the vividness of the last downturn has made market participants more sober. As a result, there has not been as much of a boom.
To the extent there has been exuberance, it has tended to be a bit smaller in scale and more localized than what we experienced in other booms like the tech bubble of the late nineties or the housing boom in the aughts. Recent examples in our minds are 3d printing a few years ago, cryptocurrency a few years later, and marijuana stocks more recently. Today there’s a mini boom in IPOs and many companies want to be described as a SaaS (software-as-a-service) company so they can be Price to Sales multiples in the 20’s. These events bear monitoring but are not widespread or pervasive in the mind of most investors.
To the extent there are more excesses, we think they reside in the debt markets and on corporate balance sheets. The number of investment grade corporate issuers that are just a notch above junk is the highest ever. Debt is being raised on some of the loosest terms and should the economy falter, several larger issuers could fall into distress. It is worth noting that a lot of the corporate debt was accumulated to fund share repurchases, pay special dividends, or pursue mergers and acquisitions. A period where balance sheets need to be rightsized could make the overall market environment a little more difficult, because it takes an important market participant (corporations themselves) out of it, but that may not necessarily portend an end to the expansion of the real economy.
We don’t know for sure what the future holds and the forecasting game isn’t something we participate in. Absent new or better information, the best baseline hypothesis is to assume there’s a reasonably good chance the expansion continues and a smaller likelihood it does not. From our perspective, we try to construct portfolios cognizant a variety of different environments in an effort to identify and manage risk: market risk, credit risk, interest rate risk, reinvestment risk, etc. The default position that has paid off most consistently historically over various market cycles is something we would characterize as sober optimism.