When the market does bad, questions of “are we doomed” are prevalent. When it does well, comments of “we’re too high” are heard repeatedly. Now that we’re been on a long upwards trend, the question of “Where are we in the business cycle and are we any closer to recession?” is the talk.
The answer is that recessionary risks appear to remain contained. No doubt, this business cycle is long and, if this continues another year or so, it will be the longest in modern history, rivaled by the extended 1990’s and 1960’s cycles. Economists are quick to point out that there is nothing special about a long cycle that necessitates bad things are about to happen because ‘time’s up’; instead, it’s about the magnitude of growth that has occurred during the growth cycle, as well as the excesses that can arise as cycles naturally expand. This time around, growth has been slow due to demographics (fewer workers) and a lag in productivity (which tends to be cyclical). Despite hopes by the new administration of high GDP growth in the 3-4% range, it’s been shown by a variety of economists that such growth isn’t sustainable because of those long-term factors mentioned. Essentially, there would need to be a huge demographic boom (babies, that wouldn’t become productive for a while) AND a major productivity increase (from whence is unknown).
Credit markets also look relatively healthy, despite more debt being taken on by companies. Default rates have declined this year to below average levels, which is a historically positive indicator. When defaults begin to rise in earnest, due to debt levels or slowing fundamentals, the end of the cycle may be much closer.
To reiterate, it doesn’t appear that recessionary risks are imminent mostly due to the lack of excesses or ‘bubbles’ that have characterized prior periods. This doesn’t mean it won’t happen at some point and there are, of course, any number of wildcards that could enter into the equation. Examples would be an oil price shock or policy error, such as the Fed raising rates by too much and/or too soon, or politically from a trade war or currency war, and the risks of either have fallen as of late.
Therefore, continue to stay diversified, rebalance regularly to your long-term objective, and keep enough cash set aside so that you have liquidity and won’t worry about the volatility in your investment portfolio!