EC The Good, The Bad, The Bubble And The Downright Crazy

In this article I will examine current conditions and future trends in the U.S. economy and financial markets. U.S. and global stocks continue to be the standout performers, and thus have garnered most of the headlines. The S&P 500 index has risen 86% over the past five years. In a normal world this would suggest that the U.S. economy has been growing briskly, and is expected to remain hot for some time, which has been the dominant narrative in the media. In terms of longevity, the current economic expansion is definitely one of the best on record.

The U.S. economy has been growing for 103 consecutive months as of January 2018, which makes it the third longest expansion ever, and there is a good chance that we will break the record of 120 months set from 1991-2001. But, once we get past the employment numbers, the stock market’s spectacular performance is not well-supported by economic or financial fundamentals, the media’s glowing narrative notwithstanding. This means that one of the following must be true: economic growth and corporate profitability is about to shift into a higher gear; the stock market will suffer a sizable correction or even bear market in the next year or two; or 21st century markets have morphed into a world of pure imagination, where stock valuations can remain disconnected from economic reality forever.

Employment-related statistics are the most unequivocally positive, so that’s a good place to start. The national rates of unemployment (4.1%) and underemployment (8%) are now equal to the rates achieved at the peaks of the last 2 economic expansions. There are a record number of people employed in the U.S., and companies continue to add new workers at a pace not seen in almost 20 years.

The labor force participation rate is one of the few items of concern on the employment horizon. The participation rate is the percentage of work-eligible adults who are employed or looking for work. This rate is now 5% lower than during the expansion of the 1990s. According to the Brookings Institution, labor force participation has fallen most dramatically for veterans and workers with less than a high school education. An increased reliance on disability insurance and a mismatch of worker skills vs. available jobs also affect people’s decision to seek work. Another troublesome point concerns the millennial generation. According to the Pew Research Center, more 18-34-year-olds live at home with their parents vs. any other living situation. Not surprisingly, that age range also has the highest rate of unemployment compared with any other demographic. (But don’t worry – survey evidence shows that millennials consider themselves happier and more socially connected than their parents.)

With the employment picture looking relatively rosy, next we’ll take up the thorny topic of growth, another topic we’ve heard a lot about on both the state and national level. Exhibit 1 shows annualized growth in real GDP since the Reagan era. Growth in the U.S. has been slowing steadily for over 35 years. The text boxes show that the average annual rate of growth has declined by exactly 0.8% per year for each of the four expansions since 1982.

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Moon Kil Woong 1 year ago Contributor's comment

Clearly fear of losing out has taken the upper hand. My suggestion for late entries such as the writer is, if you are getting in this late, to shop for lagging stocks which are only being suppressed because many investors can't handle owning anything but rockets anymore and are dumping anything else without regard to fundamentals.

Robert A. Weigand 1 year ago Author's comment

Thanks for your comment. I did not mention my personal portfolio holdings in the article, however. No worries -- I've been "all in" since 2009. Best regards.

Duke Peters 1 year ago Member's comment

Nice job, I'll count this article among my "good" list.