2019 Second Quarter Market Update

On July 1 the US marked 121-months of economic expansion – the longest period of growth without a recession in American history.

It all started back in the summer of 2009, when we finally started to scratch back from the Great Recession, although the turn-about wasn’t official until December of that year. Folks, we’ve come a long way.

But for many, this historic accomplishment has felt more like a fizzle than a bang.  That sentiment may stem from the slowness of this record-breaking expansion.

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Remember the rollicking years between March 1991 and March 2001? During the latter half of this decade, we were riding high on the dot com bubble, investors were driving stock prices to record highs, and everything was gangbusters until the crash came. The fast and furious pace of that last expansion may be preventing us from appreciating our current blessing: A solid, albeit shallow, recovery from a crushing 18-month recession.

In the past, we’ve experienced recoveries in the 4%, 5% and 6% range. But now, we’re looking back at a decade of between 1.5% and 3% growth, and it feels…meh. I’m a big believer, however, in the old fable of the tortoise and the hare – slow and steady wins the race.

Chart from Strategas

Our nation’s capitalist economy is fertile ground for this type of longitudinal expansion. The growth comes by way of individual participation and the competitive distribution of goods and services. Our long-standing economic system also allows for competitive markets, wage labor, voluntary exchange and capital accumulation.

It is the American way.

Our country is like no other. And the capitalist environment in which we live is made possible by a variety of factors, some unmistakably American:

  1. The Rule of Law. This is our unshakable foundation, though there may be ebbs and flows. Our laws give us a very clear template of right and wrong not just civically, but within businesses and in regard to intellectual and other property rights. 
  2. A Tax System (of Incentives). Our tax system, whether you approve or disapprove of it, incentivizes business creation and the building of long-term wealth.
  3. Freedom. In America, we have freedom of speech, free and open elections, equal protections, and, most importantly for our discussion, a free market economy.
  4. Entrepreneurial Mindset. The US is the global center of entrepreneurship and innovation.
  5. Hard Work. There is a reason the idea of the “American Dream” exists. We have a population that wakes up every morning and strives for a better future because they know it’s possible. We live in a system that allows for growth. We are home to jobs that come with opportunities to advance and to a vast education system that enables people to garner even more advancement through learning.

As you can see, our system is structured and has been molded to allow for every American to strive for a bigger, better tomorrow. The best place to work isn’t Apple, Microsoft or Google. It’s in the US. Our freedom and independence give us all the opportunity for growth, both individually and as a country.

When looking at our current economic expansion, it’s important to remember that we are all playing the long game. While details do matter, it’s helpful to zoom out and look at the bigger economic picture – the market over months and years and decades versus just days or weeks.

Take a look at this chart, which shows the comparative strength of our current economic expansion against previous growth periods:

Chart from Strategas.

During the 1949-53 period, we were coming out of WWII and growing with pent up consumer demand at nearly 7% per year. Then, in 1961-1969, a roughly eight-year expansion stuck around at an average of 4.9%. Beginning in 1982 and going through 1990, we were at 4.3% a year growth and almost 40% above the prior economic peak. From 1991 to 2001, we grew at 3.6% with a 50% expansion above the previous economic peak (dot com, anyone).

And here we are today. We’re 121 months away from the depths of 2009, and we’ve barely averaged above 2%, and have skimmed just over 20% above the prior economic peak. So, we have grown slowly and shallowly. Slow as in 2% – 2.25% growth. And, shallow as in only 20% above the peak, or new economic ground. 

Personally, I think there was more pain left over this time in the minds of investors after enduring two massive recessions in 2000-01 and 2007-08. Each rocked our collective confidence and scared banks into keeping capital very tight for many years into the current expansion.

Still, I look at this chart and see a very solid 10-year period. We have what I would call a “plow horse economy,” meaning that although we’re not running a sprint, we keep plowing new ground (and may for some time to come).

Still, some naysayers are disappointed with our current economic scheme, whether because of the politics or because, as I mentioned earlier, it has come off more like a sparkler than a roman candle. but there is no perfect glide path to economic stability and growth.

I choose to bask in what we have accomplished and where we may be headed. 

Let’s zoom in on the economic picture as a reference.

Recently, Robert Doar, the president and Morgridge Scholar at the American Enterprise Institute, offered some commentary on where we are economically, and it deals with everyday Americans:

“Here’s a big idea – something to keep in mind as you hear about inequality and mobility. The middle class is shrinking, which might make it look like capitalism is failing workers. But the lower class is shrinking, too. Meanwhile, the upper class is bigger than it has ever been.

About 28% of households now make more than $100,000 per year, more than double the rate of 40 years ago. More than half of Americans will be part of the top 10% of earners at some point in their lifetimes. Contrary to much contemporary rhetoric, workers in the US are getting richer, not poorer, as competition in the free market allows them to purchase a greater variety of goods for less money than ever before.”

Do we ever hear this side of the coin? Typically, no. Most talking heads would have you believe that jobs are vanishing and wages are drying up, leaving middle- and low-income earners to bear the brunt of losses. We hear a lot about “the working poor” versus the 1%’ers. Is this a fair comparison?

If we consider the data, while the middle-income class is shrinking, so too is the lower-income class. When viewed in this light, the growth of the higher-income class isn’t so bad after all.

Consider also that about 28% of all US households now earn more than $100,000 per year. This data point represents a massive increase, up from 19.9% in 2014 and more than double the percentage of 40 years ago. 

Perhaps more stunning is that more than 50% of Americans (or roughly 150 million people) will, at some point during their working careers, be in the top 10% of earners. More than half, folks, will achieve significant financial success in our country. This statistic means that the majority of US workers have done something very right economically.

Contrary to what we hear on the debate stages and in news reports, if you are willing to work in the US, you will likely get richer. The numbers support that, and I believe in numbers.

Some also argue that $100,000 ain’t what it used to be. But annual earnings of $100,000 provide comfort and room to save to be a happy retiree. Remember, many happy retirees have $500,000 socked away and spend an average of between $5,000 to $5,500 a month (adjusted for inflation from previous 2014 numbers) based on the research from my book. At a 15% tax rate, happy retirees can live off of somewhere between $75,000 to $80,000 for a couple.

Back to macro-level growth, I’m fascinated by our economic story. I love the study of economics because it’s multifaceted – part science, part philosophy, part art and part psychology (especially when it comes to emotions around consumer incentives, investing, and the P-word, or politics). Sure, you have to be able to crunch the data from segments like retail spending and housing starts, but there’s more to the whole than the sum of its parts.

Economics is an ever-changing landscape, and understanding the past and the present can give us a peek into what’s to come.  

Consider this chart, which outlines the periods of economic expansion, the annual employment growth and annual GDP growth:

Taking a step back, it may be difficult to understand all of the American Gravitational Good that has happened and is happening. For instance, jobless claims rose at last print, showing an unfavorable upward trend. Manufacturing in the US is a slowing trend, too. The US 10YR Treasury Bond is flirting with a mark below 2%, which signals a slowdown and that the Federal Reserve (Fed) may need to lower rates.

Yet, the length of unemployment has fallen to 9.1 weeks, and wages have risen to the 3%-plus range. From a Wall Street Journal report from June, “household net worth [the total value of household assets minus their liabilities] grew 4.5% in the first quarter to $108.6 trillion, offsetting a 3.7% decline in the fourth quarter of 2018.” This number represents the biggest quarterly gain since the fourth quarter of 2004. According to the report, “much of that gain comes from a 12.4% increase in the value of household holdings of corporate equities due to the recovery in the stock market.”

And, the S&P 500 is “up 12.8% on the year after falling 6.2% in 2018.” This number represents the most massive jump in 14 years, almost $110 trillion, while debt payments as a percentage of income is the lowest it’s been in 40 years.

Bottom line: this is good news.

As we come off ten solid, plow horse economic years in the US, you may wonder whether we can continue for another ten? My best educated guess is no. But, it also doesn’t have to end tomorrow simply because our current expansion has been around for a decade. We could see another year, two or three. Only time will tell. 

But, the next recession will be okay; it’s normal. And, every time we’ve had an expansion, like a phoenix it has come from the ashes. A recession is the birthplace of expansion, so there’s nothing to fear.   

I’ll leave you with this final word from Robert Doar on the power of the US economy:

“Capitalism isn’t broken – it’s our best shot at keeping the American Dream of freedom and success alive.”

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