While Australia enjoyed its 26 years or 104 consecutive quarters of positive economic growth, the largest economy in the world – the US economy achieved a milestone of its own.
As June 2017 came to a close, the current US economic recovery and expansion turned eight years old, the third longest since the end of WWII. That’s according to data compiled by the US National Bureau of Economic Research (NBER), which marked the end of the Great Recession in June 2009.
8 YEARS, SO WHAT?
In a vacuum, eight years may not mean very much to the average person, so let’s put it in perspective. Including the current economic recovery, there have been twelve such recoveries since WWII.
The eight-year, or 96-month-long expansion, has only been exceeded by the expansion that began in 1991 and lasted 120 months, and the expansion that began in 1961, which lasted 106 months, or nearly nine years.
The shortest one managed to survive only 12 months. It began in 1980 and fell victim to then Fed Chairman Paul Volker’s decision to use monetary policy–sharply higher interest rates–to crush years of high inflation.
WHAT DOES THIS MEAN FOR INVESTMENT MARKETS?
By now you may be asking, “What does that mean to me and my investments?” Or, “The current recovery isn’t young anymore. Is a recession around the corner?”
Bear markets correlate closely with recessions, according to data going back to the mid-1960s (St. Louis Federal Reserve S&P 500 data, NBER).
Expansions eventually come to an end–that’s a given. But they don’t die of old age. Instead, they historically come to an end due to economic excesses, i.e., the tech boom of the 1990s or the housing boom of the last decade. Or, the Federal Reserve raises interest rates too high too quickly, discouraging lending and consumer/business spending.
One of the hallmarks of the current expansion has been its slow and boring pace. For many who have seen wages stagnate or haven’t experienced the benefits from the modest-at-best expansion, there is one silver lining. The slow pace of the recovery has failed to stoke the euphoria in real economic activity that can sow the seeds of dangerous excesses.
It has also led to a super cautious Fed, that has been slow to tap on the monetary brakes.
WHAT SHOULD INVESTORS DO?
Economists don’t have a good record of calling turning points in the business cycle. So, I won’t try to predict when the next recession will set in.
What I can say is that we can never discount unexpected volatility and we have no control of its timing and magnitude. That’s why it’s critical to have an investment plan that is aligned with our investment philosophy and long term objectives so that we don’t waver when the going gets tough. Equally important, the investment plan needs to take unexpected turbulence into account and minimise risk exposures through effective diversification.
Remember, timing the ups and downs in investment markets is rarely profitable longer term. In reality, it only delays the day you reach your financial goals.
Peter Lynch, who successfully ran Fidelity’s Magellan Fund during a long period of explosive returns, had this to say about market timing, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”