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What if?

| May 14, 2018
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The current bull market recently passed the nine-year mark, now the second longest in history, and surpassed only by the 12.3 year bull market between the end of 1987 and early 2000. While the magnitude of investment returns of the longest bull clearly outpace the current one, it occurs to us that there are more than a few similarities between the two. Long running bull markets are typically catalyzed by significant events, and our current bull run is no different in that regard. The recently-passed tax reform bill, which puts the corporate tax rate at its lowest level in 69 years, certainly qualifies as an historical event. With economic growth measured by GDP this year and moving forward on pace to roughly double rates seen in first eight years of this rally, and leading economic indicators (LEIs) consistent with above trend growth, it is fair to speculate if the current bull is capable of setting a record for longevity.

In spite of several key differences, the current period and the 1980s share more than a few commonalities. No question, the two occupants of the Oval Office (Reagan and Trump) could not be more different in tone and temperament, much to our chagrin more often than not. However, in both cases markets see a change-maker in the White House slashing taxes, asserting domestic economic interests here and abroad, and initiating potentially positive breakthroughs in foreign policy, along with GDP growth estimates once again north of 3% and more deregulation coming to the banking and energy industries.

Sadly, reality demands an accounting of similar challenges that exist today compared to the former bull market period. An epidemic of domestic drug addiction, growing incidents of gun violence, and socio-economic turmoil in the Middle East and Latin America (Nicaragua and El Salvador in the 1980s, Venezuela today) are familiar to those of us who lived through them the first time around. Plus, the developed nations of the world face an accumulating mountain of debt that is worse than the 1980s, not only in magnitude but also compared to GDP, which ultimately matters more.

A factor currently in our favor is that, from the perspective of the global economy, oil price spikes in the Middle East will have less of an impact here at home compared to three decades ago. Back then, the U.S. was much more reliant on the oil-rich countries of OPEC. Today, highly advanced energy extraction methods will soon turn the U.S. into the top oil and gas producer in the world.

While both periods are blessed with strong GDP growth and low unemployment, in the Reagan years in the 80s we were still ratcheting down from extremely high interest rate levels, and these days we’re only seeing incremental shifts upward from historically low levels.

Also, in the 80s, Tech was still a high-growth industry, not yet fully realizing its economic potential. College students studied programming and entered the field straight out of school; these days, Tech is rich, mature, and having its issues finding enough new employees with the proper skillsets to continue their growth trajectories, especially with a dampening of current U.S. immigration policy in play. Further, back in the MTV era, China was merely an economic plot-point for American industries to potentially address; today China owns tons of U.S. debt, supplies most of our cheap goods and is in danger of entering a trade war with the U.S.

So for all the similarities, we are also in a unique place currently. The best thing about history is that it’s there to be studied — if we can learn from the mistakes we made back in the 80s (consider things like the market crash of ’87), we can move forward even more strongly than we did then, more strongly than we are at present.

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