We know the economy, like the markets, goes up and down. It expands and contracts, as naturally as the tides come in and go out, or day gives way to night. Although much in life is unpredictable, it seems worthwhile to consider where we might be in the economic cycle.
The collapse of one or more of four major economic sectors has long been a factor in recessions. Home building, auto sales, capital investment by business, and inventories have been susceptible to booms and busts. Currently, three of these remain below long-term averages while auto sales seem to be at a sustainable pace.
LPL Research recently examined the Leading Economic Index and concluded that ‘plenty of gas remains in the tank’ for a growing economy. The index is based on ten separate data points, which we find have a history of usefulness: average weekly manufacturing hours; average weekly new claims for unemployment insurance; manufacturer’s new orders for consumer goods and materials; the Institute for Supply Management Index of New Orders; manufacturer’s new orders for nondefense capital goods excluding aircraft orders; building permits for new private housing units; stock prices for 500 common stocks; the Leading Credit Index; the interest rate spread (10-year Treasury bonds less federal funds rate); and average consumer expectations for business conditions. We concur with LPL Research.
The bond market gives us hints about the possible direction of the future through the yield curve, which remains pointed in the right direction for continuing expansion. So the fundamentals for continuing economic growth seem to be in place.
Do we have worries or concerns? Shoot, yes. The world is an uncertain place. There are political risks as long-standing relationships with our allies change, and potential new rules about trade and taxes promote uncertainty.
As long term investors, we do not need to fear recessions—we need to be ready to take advantage of any bargains that may result. We have taken steps to try to mitigate risk, although there are no guarantees against unwanted and unexpected volatility.
Bottom line: we expect continued growth in the economy, but we will try to be ready for anything. If you would like to discuss how this applies to your situation, please write or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
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