market cycle

The Coming Boom?

© Can Stock Photo / devon

We wrote more than a year ago about the steady if slow growth of the economy. Just as a slow-burning fire might last longer than a raging conflagration, we expected that the economic expansion would persist longer than some commentators believed.

Another way to say it is, a bust is less likely without a boom first. The excesses that build in boom times usually contribute to the bust that follows.

For the first time in a decade, conditions may be ripe for a boom. The improvement in small business sentiment and increased money flowing into the equity markets had us on the lookout for signs of a boom. Then the tax law passed.

The tax law has pro-cyclical features that may strongly encourage economic growth now, but plants the seeds for a later slowdown. There may be political aspects that contribute to this syndrome, too.

Businesses investing in long-lived capital investments will be able to deduct the full cost up front, instead of taking smaller depreciation deductions over many years. This increases the financial attractiveness of projects; capital spending is likely to rise. A dramatically lower tax rate on corporate income, combined with a feature to bring overseas money back to the US, are further inducements for more business activity.

For two administrations in a row, the signature achievement of each has been done on a partisan, party line vote. When the minority party becomes the majority party, that achievement gets attacked and the unwinding begins. We’ve seen it with the Affordable Care Act; some Democrats are pledging to undo the tax law as soon as they are able.

So the favorable treatment of capital spending begins to phase out in a few years, and corporations may ‘get while the getting is good’ before the law gets weakened or unwound. These conditions might begin to affect things precisely when excesses from the boom have created more potential for a slowdown.

Boom, then bust. We know how this works. Clients, we will continue to monitor all of this, and work to take advantage of our thinking. No guarantees.

If you would like to discuss any of this in more detail, or have something else on your agenda, please email us 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.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

All investing, including stocks, involves risk including loss of principal.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

 

Slow Burn

© Can Stock Photo Inc. / cafaphotos

We are now in the 7th year of economic expansion and recovery since the last recession. Many commentators insist that after such a long stretch, the next recession must surely be right around the corner. Of course, they’ve been insisting this for the past 7 years–remember the term “double dip”? The recovery didn’t make it a full year before people started predicting its demise, and now here we are seven years later.

Part of the longstanding skepticism surrounding this market cycle is grounded in the weak performance of this expansion. It’s been a long, slow recovery since the recession started in 2008. In a lot of people’s minds, those two things don’t go together. They think, “The recovery is going slowly, so it must not have enough fuel to keep going for very long.” There is a certain intuitive appeal to this way of thinking. We tend to see something moving quickly as having more momentum, so it would take longer to come to a stop.

The economy doesn’t really work in terms of “momentum”, though. Instead, market cycles tend to be driven by sentiment. In a normal expansion phase, optimism feeds into faster and faster growth, eventually creating a bubble. When the bubble finally pops at the height of its exuberance, values plummet and the economy is likely to plunge into recession.

You can think of it in terms of an out of control fire. The bigger it gets, the stronger it gets—but the faster it burns through its fuel. A raging conflagration will consume its fuel and die down to embers faster than a more contained fire.

In this analogy the current economic cycle has been a slow, cautious burn. The fire is burning away quietly but hasn’t really erupted into a general blaze—pessimism is widespread and we haven’t really seen the kind of manic stampede that marked the last days of the previous few expansions.

We never know how much fuel there is left for our “fire.” The expansion must eventually run itself down, but this may be a matter of months or days or years—we can’t be sure. However, we view the slow pace of recovery as an indicator that there may be a good bit of fuel yet untouched.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

We Know How This Works

© Can Stock Photo Inc. / numskyman

In late summer 2015, the price of crude oil had fallen in half to around $50 per barrel1. The oil industry had retrenched, cut budgets, and laid off people. Companies knew projects that would make a lot of money at $100 per barrel could bankrupt them at $50 per barrel.

We wrote then that low prices would boost demand and cut supply, planting the seeds of the next shortage and the return of high prices. Sure enough, sales of large vehicles and total miles driven are setting records and exploration for new oil has crashed.

No one knew how low prices would go—we never do. It was frustrating to invest too soon in the sector and watch our holdings shrink in value. The price of oil fell by half again! We stayed the course and kept buying perceived bargains. It is gratifying to ultimately get it right.

Now Bloomberg reports that new oil discoveries are at the lowest level since 1947. Supplies that should be coming on the market eight or ten years from now will not show up. Low prices are doing what they always do: choking off supply.

We can’t know the future. But we know how this works. If you have questions or comments about your situation or holdings, please email or call us.

1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data (FRED)


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Next Recession is Coming, Continued

Federal Reserve Bank of St Louis
Federal Reserve of St. Louis

Once again it is time for our quarterly assessment of economic conditions. Is the economy growing or shrinking? This is the fundamental question.

The next recession is always out there, of course, as is the recovery which will follow it. The excesses that build up in good times lead to imbalances that get corrected by economic downturns. But what are the current indications?

• The Index of Leading Economic Indicators is supposed to point to the direction of the economy in the months ahead. It has remained solidly in positive territory.
• The bond market speaks to us about economic conditions through the yield curve. Although it has flattened somewhat recently, it remains in growth mode.
• The Current Conditions Index from LPL Research remains in positive territory.
• The “Overs,” a proprietary LPL measure of potential over-spending, over-borrowing, and over-confidence, point to continuing expansion.
• Details on the LPL Research work are available here.

Economic news is always mixed, and can always be better. But jobs and incomes and spending continue to grow in fits and starts. The weight of the evidence says we are doing OK, at least.

We do have challenges. Policy makers attempt to manage the economy from above, using a philosophy that was discredited long ago. Their interventions create distortions which we monitor carefully. Much of our work involves avoiding the problems created by people trying to “help us.”

We are on the job, doing the best we can to preserve your interests and take advantage of opportunities as they arise. Call or email us if you have questions or comments.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and may not be invested into directly.