May 2, 2017
The United States’ economy passed a significant milestone in March. According to the National Bureau of Economic Research (NBER), the expansion that began in June 2009 is now the third-longest on record. Only the nine-year expansion of the 1960s and the 10-year expansion of the 1990s have lasted longer. Some people are beginning to wonder how much longer it can continue.
Yet, the nature of the recovery has been different this go around. While the unemployment rate has steadily fallen, the rate of economic growth has, at times, been tepid and persistently below average. As history shows, this is not uncommon after a recession caused by a financial crisis, as the excesses of the previous cycle are difficult and take a long time to work off.
Moreover, expansions do not typically die of old age; rather, it takes an unforeseen shock to confidence or very tight monetary policy engineered by the Federal Reserve (Fed) to slow down the economy before it surpasses its capacity, thereby leading to inflation. So far in this cycle, inflation remains well below long-term averages, allowing the Fed to continue its path of normalizing monetary policy patiently, as evidenced by its move in March. This expansion may be reaching old age, but it is still young in character.
In the immediate aftermath of the U.S. presidential election, there was much optimism that a single-party government would be able to deliver pro-growth and inflationary (“reflationary”) policies quickly and efficiently to help the economy regain its former mojo. The hope was that corporate tax cuts, infrastructure spending, and the deregulation of the health care, energy, and financial industries would provide the tonic the U.S. economy needs. This first quarter was defined by the way in which those lofty and unrealistic expectations of immediate reflation came back down to earth. The disastrous first attempt to repeal and replace the Affordable Care Act reminded investors that waiting for change in Washington is like waiting for Godot. By the end of the quarter, heightened geopolitical concerns added to investor uneasiness.
As a result, bond yields fell during the quarter, retracing half of their rise since November, and the U.S. dollar weakened. Stocks still outpaced bonds, driven by international (especially emerging) markets, which helped boost returns. The untold story of 2017 so far is that beneath the headlines about politics and geopolitical concerns, there are clear signs that both global GDP growth and corporate earnings growth have continued to improve. This has occurred while long-term interest rates have moderated, implying stock markets are now exhibiting better relative value against bond markets while continuing to enjoy the tailwind of momentum.
Unlike Samuel Beckett’s play, Godot may actually arrive at some point this year, even if not as quickly or as effectively as many are hoping. Yet, even if gridlock continues to undergird Washington, there is historical precedent for this record-setting economic expansion to continue for a while longer despite a backdrop of slowly but steadily rising interest rates. As always, we will be monitoring our models and market-leading indicators to detect a noteworthy increase in the chances of the next economic downturn. Until then, we will lean into the opportunities the market is providing.
 Since NBER’s data begin in 1854.
 Famed MIT economist Rudi Dornbusch quipped, “Unlike people, expansions don’t die of old age; they are always murdered by the Federal Reserve.”