The current economic expansion turned 10-years old in July, becoming the longest period of sustained economic growth in U.S. history. During the current cycle, GDP of the U.S. economy has grown 22%. That number is sluggish, however, when compared to the 43% growth in GDP that took place from 1991-2001, a 10-year span that included a short recession in 1993.
Inflation has remained subdued despite the sustained period of economic growth, consistently languishing below the Fed’s 2% target. This is unlike past expansionary periods which ended with high inflation and the Fed raising interest rates to cool the economy.
The labor market has been strong in the past ten years, with unemployment consistently below 4% and new jobs being added every month. However, wage growth has grown at a slower pace than in past expansionary environments.
The U.S. stock market has quadrupled since bottoming out during the Great Financial Crisis, culminating in the all-time highs reached by the S&P 500 at 3,000 and the DJIA at 27,000 during July. Bond markets, however, have been somewhat mixed over the same period, as ultra-low interest rates and the impact of quantitative easing across the globe have reduced yields and impaired the overall attractiveness of bonds for many investors. In June of this year, the yield on three-month Treasury bills exceeded that of 10-year Treasury bonds by the widest margin since 2007, creating what is referred to as a yield curve inversion. A sustained inversion is said to point to an impending recession within the coming 12-18 months, though investors don’t yet seem stymied by this particular indicator.
As evidenced in the outcomes above, the unprecedented levels of quantitative easing implemented globally by central banks have resulted in a remarkably long period of stable but tepid economic growth. Throughout the last decade, central bank policy has largely dictated the significant outperformance of risky assets, such as stocks and high-yield bonds. As the current run of economic expansion extends into its eleventh year and central banks continue to evolve their policy, institutional investors should evaluate these five considerations for the years ahead.