It's great to be able to look back and makes sense of the past. Too bad we can't rewind the clock to make those blockbuster investment that, in hindsight, now make so much sense. In recently writing to clients about the longevity of the current bull market for U.S. stocks, I realized the current economic expansion is starting to rival some of the extended uptrends of the past.
Are we back in the 1990s? The longest uninterrupted economic expansion here in the United States ran for 10 years from 1991 to 2001. A close second was recorded back in the 1960s when an eight-year, 10-month expansion occurred. Just as a side note, both of these long expansions were accompanied by very successful periods for stock investors. In case you're curious, third place goes to the expansion from 1982 to 1990, a period of seven years and eight months, also a pretty good period for equity investors.
Back to the present, the interesting part of the current expansion is that it does not appear close to an end, at least with the information we have in hand. At five years and seven months we aren't close to any records, but this trend has some characteristics in common with other long uptrends.
My favorite at-a-glance indicator is the Conference Board's Index of Leading Economic Indicator. Built from many individual components, this indicator has successfully identified all of the economic recessions of the last 50 years. Recessions are highly likely to occur when the LEI experiences a year over year decline, meaning it is lower today than 12 months ago.
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The LEI has been rising since 2009 with the exception of a few monthly readings in 2011, and today stands 6.5 percent higher than its year ago level. If past trends hold true, which we can't guarantee, there won't be a recession in the United States for at least a year, and that would be indicated if the LEI started to turn down starting in February of this year.
Other trends which may well support this expansion continuing for a
while include the current low interest rate and inflation environment. Most recessions are induced by monetary authorities trying to control the rate of inflation by raising interest rates. The Federal Reserve may well start to raise interest rates in the near future, but even several increases would leave short-term rates at historically low levels.
The recent drop in the price of oil is acting as a tax cut for the middle and lower economic classes, allowing them to have more disposable income for other purchases, which is supportive of an expanding economy. We don't know how long this will last, but we should enjoy it while the low prices are here.
The economy will probably continue to grow for a while longer. Should investors take this as a sign to be confident and ignore risk? I think not. History also shows stock prices tend to turn down in advance of the realization that a recession has arrived. It's not time to get defensive, but a cautious stance is warranted.
Tom Breiter, president of Breiter Capital Management Inc., a registered investment adviser, can be reached at (941) 778-1900 or by e-mail at firstname.lastname@example.org