Records Are Meant to Be Broken
It’s spring (even if the recent snowstorm says otherwise) in Chicago. And with spring comes baseball season. Being a baseball fan and a numbers guy, there are two numbers that once had incredible significance in baseball lore – 714 and 2,131. The first was Babe Ruth’s career home run total and the second was Lou Gehrig’s consecutive games played streak. When Ruth and Gehrig set those records in the 1930s, nobody thought either would be broken. But in 1974, Hank Aaron surpassed Ruth’s home run total, and in 1995 Cal Ripken eclipsed Gehrig’s game streak. Two seemingly unbreakable records shattered mere decades after they were set.
While I’d love to talk baseball all day long, this is after all a Wealth Watch communication. So, let’s shift gears and talk about two other notable records from the financial world. The first is the current bull market for stocks, which is already the longest in history. The second is the current economic expansion, which will soon be the longest in history.
Both the bull market and the expansion are over 10 years in length – and still going. Of course, this gets pundits and investors nervous. After all, nothing market-wise or economy-wise should last that long, right? Being a lifelong Cubs fan, and therefore an optimist by nature, I would argue that even after 10 years, both the stock market and the economy have room to run. Here are some reasons why:
- The low point for the stock market following the financial crisis was March 9, 2009. Since then (through April 17, 2019), the S&P 500 has returned a remarkable 329% (not including dividends)! Even following such an amazing rally, US stocks are not overly expensive relative to their long-term average valuation. The forward-looking price-earnings ratio of the S&P 500 was 16.4 as of March 31 versus a 20-year average of 15.8. The reason stocks in the US aren’t overvalued is because corporate earnings have grown tremendously since 2009. Low interest rates, low inflation, and tax cuts have helped for sure. And with the Federal Reserve on pause for raising rates, conditions should remain favorable for earnings and stock returns going forward.
- It’s been an amazing 10 years for the S&P 500. However, other areas of the market haven’t done as well as the S&P 500, such as small company stocks, value-oriented stocks, and stocks outside the US. As a result, those asset classes are relatively cheap compared to the S&P 500. That’s another reason why there is still optimism for stocks.
- The current US economic expansion will soon be the longest in history going back to the US Civil War. However, when compared to past expansions, this one is the shallowest. It’s been a slow and steady recovery rather than the “v-shaped” recovery that typically occurs after deep recessions. Because the economy hasn’t rebounded sharply is one reason we expect continued economic growth through 2019 and into 2020.
- Another reason that the economy is likely to grow further is that none of the key cyclical economic measures (home sales, vehicle sales, business investment, and inventories) are at levels indicative of an impending recession. Furthermore, job growth continues to be strong and unemployment remains low. And the Fed has decided to keep interest rates as is, which should keep the economy on solid footing.
Nothing lasts forever. That’s true for bull markets, economic expansions, and for records. Eventually this bull market and the current economic boom will come to an end. In 2018 we came close to bear market territory (a 20% pullback) but just missed. The fourth quarter of last year was the worst quarter since 1931. Yet stocks have bounced back dramatically so far in 2019. And during this economic expansion, we’ve had quarters of anemic growth, quarters of robust growth, and plenty of in-between.
So, while we know nothing lasts forever and records are meant to be broken, the challenge is that we can never know for sure when. What we do know is that most predictions are wrong and that most market pundits and economists consistently mis-predict. And as we know from baseball history, records once thought unbreakable, eventually were – oftentimes when least expected.
As a member of the Investment Committee, Matt is instrumental in developing BDF’s overall investment strategy. Matt received his Bachelor of Science in Economics with concentrations in accounting and finance from the Wharton School of the University of Pennsylvania and his MBA in finance and strategic management from the University of Chicago Booth School of Business.