Hello there, gentle readers. It’s me, Mr. Not-An-Economist, with some historical context on the current state of Wall Street and “economic growth.”
Following the worst economic crisis since the Great Depression, the U.S. economy began a slow, painful recovery in the summer of 2009. We’re now 98 months into that recovery. And that’s unusual.
That’s because the average length of a single “expansion-contraction” business cycle in the United States between 1854 and 2009 is just 56 months. Roughly 39 months out of those 56 are devoted to the growth cycle.
By that pattern, the U.S. economy would have been expected to slip back into recession somewhere toward the end of Obama’s first term. Mitt Romney kept his fingers crossed, but it didn’t happen.
The Obama Recovery now ranks as the third-longest economic expansion in post-war U.S. history. The second-longest began in the second month of the Kennedy administration and ended during the first year of Nixon’s term, a period that covered 106 months. The record-holder, generally remembered as the Clinton Recovery, covered 120 months, and actually began in the spring of George H.W. Bush’s single term. It ended 10 years later, in the second full month of his son’s presidency.
On the other hand, this has been a relatively weak expansion. The Kennedy-LBJ Expansion produced average GDP growth of 3.2 percent, but featured six years with growth of more than 4 percent, topping out above 6.5 percent in two consecutive years. The Clinton Recovery was less robust, yet featured GDP growth of more than 4 percent five times, finishing with a modest 2.1 percent average..
We don’t have the final figures on the Obama Recovery, but it topped out at 2.9 percent growth in 2015, and had four years of growth below 2 percent.
So that’s the economy. What about the stock market?
First, the terminology: A bull market is defined as stock prices that continue rising without being interrupted by a 20 percent decline, which officially signals the start of a bear market.
The bull market we’re riding is now the second longest in Wall Street’s history. It began during the depths of the Bush Recession, just two months into his successor’s administration, with an upturn in the S&P 500 in March 2009. Republicans will hate this, but call this profitable run what it is: The Obama Market.
Not that Republicans don’t have reason to feel smug. Despite Hillary Clinton’s prediction that a Trump win would spook Wall Street, the opposite occurred. Stocks are up more than 12 percent since Trump took office. That’s still not as good as the market’s gains between February and October 2009, but the President is right: Wall Street just keeps breaking records in 2017.
Which brings us, finally, to the present.
The economy continues its pattern of modest expansion and weak wage growth. Trump’s predicted 3 percent GDP growth now looks unlikely, with analysts currently anticipating a number around 2.4 percent — right on par with those glorious days of 2010. Republicans still have a chance to pass a new tax plan this year, but it’s not off to a good start. In fact, it’s not even a plan yet.
Meanwhile there’s Wall Street. The aging bull continues its respectable run, but some investors are beginning to see signs of structural weakness and nonsensical euphoria. Here’s Mark Decambre, writing in MarketWatch, earlier this morning:
The most recent issue of The Economist highlights how breathtakingly high markets have gotten, with its cover titled “The bull market in everything.” But the British business magazine does cast a jaundiced eye at markets, asking “Are asset prices too high?” on the same page.
Valuations are, of course, the trillion-dollar question. By some measures, this is the most overvalued market since the dot-com bubble and 1929 at around 31.11 times earnings. That gauge is based on The Shiller PE, a popular measure of equity values based on inflation-adjusted earnings from the previous 10 years that was devised by Nobel laureate Robert Shiller. Current levels are twice historical averages, and S&P 500 P/Es are 25.42, compared with a historical average of 15.68.
Those readings would suggest that investors are paying more for less.
Or as Brad McMillan, chief investment officer at Commonwealth Financial Network, said of the current “sloppy” market: “Are we in a bubble? Yeah, I think we are. But as we learned, it can go on for a couple of years.”
There are plenty of Wall Street princes who disagree, of course. Back in September, hedge fund manager Leon Cooperman of Omega Advisors called the stock market “fully or fairly” valued. Others cite record corporate earnings, consumer confidence at a 17-year high, Republican control of each branch of government, etc. But as Michael Santoli wrote for CNBC last month, “there’s broad agreement that markets have been generous for a pretty long time and the trees are stripped of the low-hanging fruit.”
As Not-An-Economist and Not-A-Financial-Advisor, I tend to stay away from such arguments. But I thought Fortune Magazine writer Jen Wieczner made an interesting point last March in observing the 8th anniversary of the Obama Market: At the time, the current bull market was 133 years old “in human years.”
“How long does this bull market have yet to live?” Wieczner asked.
No one knows for sure, but because bull markets age in what you might call dog years, if it were a human it would be very, very, very old…
Still, as Sam Stovall, chief investment strategist for CFRA points out, historically, the longest bull markets ‘went out with a bang and not a whimper. Like an incandescent light bulb, they tend to glow brightest just before they go out…”
Don’t count out the current bull market’s ability to celebrate its golden birthday on March 9 next year with similarly impressive returns. Writes Stovall in an eloquent research note this week, “Bull markets don’t die of old age, they die of fright. And what they are most afraid of is recession.”
We are currently past-due on both accounts. As documentary filmmaker Ken Burns said, “History doesn’t repeat itself. But human nature never changes.”