The latest U.S. business cycle expansion ended in February of 2020. This expansionary period was particularly noteworthy because it reached a new record length, 128 months from its June 2009 trough to the recent peak.1 Before the next expansionary cycle begins, the economy must first bottom out; when this will occur is a guessing game for economists at this point with so many uncertainties abound.
Using data from the National Bureau of Economic Research (NBER), I created the chart below that showcases U.S. business cycle expansion and contraction throughout recent history. Note that there is not a newly asserted trough date yet, this date will become clear in hindsight as activity normalizes and the economy returns to growth. Looking back at prior business cycle contractions could yield insight for predicting the eventual turnaround in economic activity. The last contractionary period was the financial crisis of 2007-2008 which saw a trough after 18 months of contraction. Even more encouraging, the dot-com bubble troughed a mere 8 months after its peak. A similar quick turnaround would be very welcomed, however, looking further back in time at The Great Depression shows a recessionary period that lasted 43 months, not quite as rosy of a picture.1
This chart was created in Microsoft Excel using data from the National Bureau of Economic Research.1
The main factor in the U.S. business cycle dating decision by NBER is the country’s Real GDP.2 In the graphic below, 2019Q4 Real GDP is shown in green, 2020Q1 is shown in black, 2020Q2 is shown in orange and 2020Q3 is shown in yellow (keep in mind these are annual rates).
This chart was created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.6
The graphic below showcases quarterly Real GDP growth from 1948Q1 to 2020Q3. As you can see the 9% year over year drop seen in 2020Q2 was a historical event.
The graphic below zooms in on the more recent history, from 2009Q3 to 2020Q3.
The two charts shown above were created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.6
While Real GDP rebounded from the second to third quarter, the year over year (YoY) Real GDP growth rate is still negative as of the third quarter. In the second quarter the Real GDP fell 9% YoY, while in the third quarter it fell 2.9% YoY. For this reason I do not believe the economy has found a trough yet.
As I noted in my 2019Q4 Lookback piece, https://almondconfirmed.com/the-economy/2019q4-lookback/, the federal funds rate was already declining heading into the 2020 year, an act taken to stimulate the economy. Since that time, the shock of the Coronavirus and preventative measures taken to curb the effects of the virus caused the FED to act aggressively and bring the target rate near zero. The effective federal funds rate stood at 1.6% at 2019 year-end and held steady until March of this year; the current effective federal fuds rate is under 0.1%.
This chart was created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.7
This near zero rate is meant to stimulate lending in the economy in order to reignite decreased business activity. This has had several implications across the economy. For instance, partially due to the lower risk free rate, the housing market has seen a large increase in activity as credit worthy individuals have been able to secure low mortgage rates. Additionally, several select portions of equity markets have benefited; as the discount rate used to value equities has decreased, the out years of profit have become worth more today.
While the efforts taken regarding both monetary and fiscal policy have been large, the unemployment rate is still very high compared to historical levels. The U-4 unemployment rate shown below captures the “Total Unemployed Plus Discouraged Workers, as a Percent of the Civilian Labor Force Plus Discouraged Workers”3
This chart was created in Microsoft Excel using data from the Federal Reserve Bank of St. Louis Economic Research website.3
The U-4 unemployment rate spiked to over 15% in April and has since declined to 8.2%, a far cry from the 4.7% rate seen in February. While the recent trend down is favorable, it is slowing, and many are concerned what the winter months will bring as Coronavirus case counts have reached new daily highs and no new stimulus bill has been agreed to.
Fortunately for investors, there have been ample opportunities to grow wealth in the financial markets this year despite the ongoing uncertainty and macroeconomic headwinds. Below is a performance table showing the year to date returns for three major stock indices, the CBOE Volatility Index, gold, and Bitcoin.
This data table was created in Microsoft Excel using data from Yahoo Finance.4
As of the end of October, the tech-heavy Nasdaq Index had the largest return year to date. But, in fact, both gold (as portrayed by the SPDR Gold Shares ETF) and Bitcoin are up even more substantially than the technology sector this year, showcasing investor desires to diversify and hedge.
Below is a graphic from Koyfin.com displaying several sectors, gold, and Bitcoin returns year to date.
This chart was created on the Koyfin platform.5
The future is never clear, and that has been especially true in 2020. With the end of the longest expansionary period on record, the U.S. presidential election around the corner and Coronavirus cases trending higher, both domestically and internationally, there is a lot to take in. However, on a positive note, historically there is a negative correlation between the duration of an expansionary period and that of a contractionary period, indicating the long bull market that just ended could foretell a quickly found trough.
No matter what the future brings, I advocate for diversification and keeping long-term goals and portfolio allocation strategies in tandem.
For insight on portfolio construction please see my recent write-up: https://almondconfirmed.com/educationalpieces/portfolio-allocation-hypotheticals/
Additionally, to see how I am keeping diversified in my personal trading account please see my Portfolio Highlights page which I update monthly. https://almondconfirmed.com/portfolio-highlights/