When I was a young economics student, I was fascinated by economic cycles. Wouldn't it be great to be an investor with full knowledge of the next recession? Those cycles ranged from 4 years to 52 years and had exotic names like Juglars and Kondratieff. However, regardless of the cycle you choose, we are late and should have already had a recession by now. In other words, we are overdue for a recession!
So what?
It is hard to over-emphasize the importance of how unhinged the economy became during the global financial crisis of 2008/9. The heroic actions of the Fed, which I strongly support, overhauled the economy in general and the stock market in particular. Economic cycles became obsolete, as our highly capitalistic economy became a managed economy. Because the Fed recognizes that it has pushed us into a strange new world, they are attempting to slowly dis-engage, restoring capitalism a little bit each month.
The Fed controls monetary policy but not fiscal policy, which is controlled by Congress and the President. America fought the greatest recession since the Great Depression with one hand tied behind our back. The Fed did their job, and Congress did nothing. Now that the Fed is withdrawing slowly, Congress is finally attempting to do something to fight the global financial crisis of 2008/9. The Pentagon is often accused of fighting the last war, and Republicans now are doing the same. I would have applauded the pending tax bill if they had done it in 2008/9.
Wall Street had adjusted to an impotent Congress and has been positively giddy that Congress may not be impotent after all. Wall Street should be reacting to corporate profits, not politics.
Speaking of profits, there is one economic cycle that may still be useful. As a percent of GDP, corporate profits increase during the recovery phase before peaking and then decreasing. Corporate profits have reached historic highs but so has the GDP. As a percent of GDP, corporate profits have stopped growing. That does not mean a recession is close or worrisome. But, it should temper our expectations for continued growth in the stock market. Everybody knows the market cannot rise 30% year-after-year. Unfortunately, if we only grow 10% next year, it will feel lackluster. It shouldn't!
So what?
It is hard to over-emphasize the importance of how unhinged the economy became during the global financial crisis of 2008/9. The heroic actions of the Fed, which I strongly support, overhauled the economy in general and the stock market in particular. Economic cycles became obsolete, as our highly capitalistic economy became a managed economy. Because the Fed recognizes that it has pushed us into a strange new world, they are attempting to slowly dis-engage, restoring capitalism a little bit each month.
The Fed controls monetary policy but not fiscal policy, which is controlled by Congress and the President. America fought the greatest recession since the Great Depression with one hand tied behind our back. The Fed did their job, and Congress did nothing. Now that the Fed is withdrawing slowly, Congress is finally attempting to do something to fight the global financial crisis of 2008/9. The Pentagon is often accused of fighting the last war, and Republicans now are doing the same. I would have applauded the pending tax bill if they had done it in 2008/9.
Wall Street had adjusted to an impotent Congress and has been positively giddy that Congress may not be impotent after all. Wall Street should be reacting to corporate profits, not politics.
Speaking of profits, there is one economic cycle that may still be useful. As a percent of GDP, corporate profits increase during the recovery phase before peaking and then decreasing. Corporate profits have reached historic highs but so has the GDP. As a percent of GDP, corporate profits have stopped growing. That does not mean a recession is close or worrisome. But, it should temper our expectations for continued growth in the stock market. Everybody knows the market cannot rise 30% year-after-year. Unfortunately, if we only grow 10% next year, it will feel lackluster. It shouldn't!
