An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013.Jonathan Ernst / Reuters
Well, as if to defy the skeptics, the current U.S. economic expansion has turned 69 months old. We are so far deep that this brings the recovery to the same stage it was at in August, 2007, during the last cycle that was so heavily skewed by the housing and credit boom that morphed into a massive bubble.
By July of this year, this expansion would have matched its predecessor in terms of magnitude, and yet there is nothing in the economic tea leaves to suggest that an end is imminent.
This is very likely going to go down as a very long cycle – perhaps matching or even exceeding the elongated expansions of the 1960s, 80s and 90s.
There always seems to be this initial fear that the economy is going to head south and the equity market tumble when the Fed switches from an easing to a tightening cycle – this concern was prevalent in 1988, 1994 and 2004 as prime examples.
And it is very normal to have a heightened period of volatility and even intermittent corrective phases during the transition phase, because uncertainty is not something the markets typically respond well to.
But perception and reality are not the same thing and the lessons of the past will be useful once the Fed does move off its seven-year-old zero interest rate policy program.
But even with the inevitable policy shift, where wider market fluctuations and the odd dip will dominate the landscape for a while, that does not make for a bear market.
Bear markets never show up with the first rate hike, or the second or third for that matter.
The tendency is for investors to initially underestimate how well the economy digests the first several rounds of Fed rate increases.
It is unlikely to be any different this time and one can probably expect the nervous nellies to be drawing comparisons to 1937/38, as irrelevant as they may be.
Now nothing lasts forever, that much is for sure, and at some point this economic expansion and equity bull market will end as they all do – but they never die simply of old age; they die of excessive Fed monetary restraint.
By the time the Fed pulls the trigger for the first time, we are typically just one-third of the way through the expansion and bull market, and that is true whether the cycles are in their infancy like the early 1980s, or later down the road as was the case in the early 1990s and again in the 2000s cycle.
No doubt we are in the sixth year of the business expansion and investment cycle which makes them look more mature than they are.
For some perspective, for most of the past six years, we have just been making up for lost time – digging ourselves out of a big deleveraging hole, if you will.
For example, employment just got back its prerecession peaks in April, 2014; the S&P 500 didn't do so until March, 2013; and real GDP didn't move back to its old peak until the third quarter of 2011, when we were already into the third year of the recovery.
In other words, we only really started this new investment cycle two years ago, in terms of building on the S&P 500 level that finally recouped the massive bear market loss from 2007 to 2009.
The time to throw in the towel is not with the first rate hike, whenever that may be; it is after the last rate hike – and even then, the cycle (both GDP and S&P) generally has 20-per-cent left in the tank, but it is at that point that the phase of lightening up equity exposure makes most sense.
Thankfully, looking at when the Fed is about to start (September at the earliest), the typical length of a Fed rate-hiking cycle (one to two years), and then the lag from the last tightening to the end of the bull market and economic cycle, we are probably looking at some time late in 2018 for the expiry date to be stamped on.
Until then, chill, and treat corrections, no matter the cause, as just that – bumps on an otherwise upward trajectory.
David Rosenberg