Our market Outlooks over recent quarters have offered clients our views into topical issues affecting interest rates, economics, and asset prices. We have also endeavored to introduce topics of interest less directly linked to current market conditions (recently, technology valuations and Behavioral Finance). This quarter, for a discussion of Bitcoin and other “cryptocurrencies”, click here.
“A synchronized global expansion is leading to a big shift in monetary policy around the world--toward central banks shrinking rather than growing—with implications for markets, inflation and the outlook for growth”: thus reads the Wall Street Journal’s opening sentence of their “The Outlook” column on October 8th.
CCR Wealth Management has chronicled the improvement in non-US economies and equities throughout the year as a validation of our overweight position in international investments. Improving global economies act as a salve, of sorts, to soothe nagging concerns about things like the length of the US expansion, current US equity valuations, and of course, Washington politics. Our role is not to make investment commitments based on near-term economic (or political) predictions, but rather to be informed by historical market cycles, while keeping a wary eye out for potential disruptions. A year ago, we cited the busy global political calendar and populist momentum as potential causes for concern. But as the year has progressed, political risk abroad has abated and the likelihood of self-sabotage (in Europe, particularly) has diminished.
The US economic expansion from the last recession is now in its 100th month. Some pundits have cited this as evidence that the US market cycle is “long in the tooth” and that equity valuations, being above historical averages, should encourage investors to take a more defensive investment posture. Let us consider the following fact. At 99 months (through September), the current US economic expansion is roughly twice as long as the average expansion over the last 117 years. Yet, it trails the expansion of the 1960’s (106 months) and the period from 1991-2001 (120 months). We have said this before, and we will say it again: Bull Markets do not die of old age. Their deaths usually come at the hands of the Fed. We also live in a shifted paradigm, as we pointed out in our July Outlook. The lowest the Fed Funds rate got during the expansion of the 1990’s was 3.0%, and while it dipped below 2% in 1961 briefly, the average through the expansion of the 1960’s was about 4.50%. Of course, in our current expansion, the Fed Funds rate has been effectively 0% for 84 out of 99 months (roughly 85% of the time).