by Kristina Hooper, Global Market Strategist, Invesco Ltd., Invesco Canada
“Getting long in the tooth” is an interesting way to describe something that is getting old and presumably nearing its end – it refers to the long-time practice of estimating a horse’s age by looking at its mouth. I’ve found myself using this expression a lot these days, as the U.S. experiences its second-longest economic expansion in the last 100 years. But investors should remember that – even as market-watchers talk about “synchronized global growth” – other economies are in much earlier stages of expansion.
Economic expansion varies around the world
The U.S. economic expansion just reached 106 months, making it the second-longest expansion in the last 100 years.1 The longest expansion was 120 months (from 1991 to 2001) while the average length of expansions is 58 months.1 Hitting this critical milestone begs the question, “How long will this last?”
My view is that this expansion has legs and could easily continue for well over a year for a variety of reasons. First of all, there is the nature of the expansion; for much of those 106 months, the growth was quite lackluster. In particular, the jobs recovery was anemic up until the last several years, which I believe means it can have a longer runway. Also, the economy got a shot in the arm recently with late-cycle fiscal stimulus in the form of the tax-reform package. And thus far the U.S. Federal Reserve (Fed) has been quite accommodative. In fact, investors seemed relieved by what seemed to be a “Goldilocks” U.S. jobs report for April, which showed the economy is chugging along, creating a solid level of jobs with relatively low wage pressure.
However, it is important to note that while U.S. wage growth was not robust last month, we have seen other signs of rising inflation (such as the core personal consumption expenditures index), which prompted the Fed to change its inflation language in its announcement on May 2. All this increases the likelihood that the Fed may raise rates four times this year rather than three. But it’s not just an increase in rate hikes that we need to watch; the Fed could tinker with the balance sheet normalization plan – and accelerate it – which could be even more impactful. It seems that very accommodative monetary policy may be getting even longer in the tooth than the U.S. economic expansion – although the fates of these two are intertwined.
Not all ongoing economic expansions are quite as long in the tooth.
- Japan’s economic recovery began a few years after that of the U.S. – the Japanese government estimates the expansion began in December 2012. It has been growing for 65 months – which is not very long by U.S. standards but is one of the longest recoveries for Japan in post-World War II history.2
- The eurozone’s economic expansion is a relative baby compared to that of the U.S. According to the Centre for Economic Policy Research, the eurozone’s current expansion began in April 2013, making it just 60 months long.
Both of these economies are enjoying more accommodative monetary policy, with the Bank of Japan appearing to be years away from tightening, and with the European Central Bank poised to continue tapering beyond September. Both regions are enjoying relatively low inflation, which gives their central banks the flexibility to stay very accommodative.
In the emerging markets, some countries have only just begun economic expansions, such as Russia and Brazil, while China has experienced years of economic expansion – with robust growth for most of those years. In fact, China’s was the fastest-growing major economy for years – but that mantle has now been assumed by India. (As an aside, I believe that India could achieve even higher gross domestic product growth in coming years given its commitment to reform.)
Talk of ‘synchronized’ growth is simplistic
I share these thoughts because we constantly hear experts refer to the global economy as being in an environment of “synchronized global growth.” For the first time in years, most economies are expanding – but the reality is that this is a simplistic assessment that doesn’t capture the nuances of different growth rates and different lengths of economic expansion. I worry that such a term suggests to investors that economic expansion is long in the tooth for all global economies, as opposed to just some economies. What’s more, each country’s economic expansion is somewhat unique, and so one must understand its specific characteristics (including central bank accommodation) to make an assessment on whether it really is nearing its end; in other words, just because an expansion is long, that does not mean it has to end.
I believe that the varied state of global economic expansion makes a strong case for the importance of global diversification for investors. Spreading exposure among a variety of different economies with different growth rates and in different places in the economic cycle may help investors guard against downside risks.
Other issues are getting long in the tooth
Looking ahead, I think it’s worth paying attention to other issues that are getting long in the tooth. For example, Brexit preparations. UK Prime Minister Theresa May was delivered a setback last week in her attempts to get her Cabinet and Parliament “on the same page” with regards to their stance on Brexit. May is a proponent of forming a “customs partnership” with the European Union (EU) once the UK leaves the EU – this arrangement would mean frictionless trade with the EU, but with independence in terms of trade with countries outside the EU. But May was unable to win enough support from her own Cabinet last week, which is emblematic of the opposition she faces within her own Tory party. Garnering support for this plan will be necessary before the UK can get back to the negotiating table with the European Union. All this has occurred as the clock continues to tick on toward the time when the UK will formally leave the EU, which is now just 10 months away (March 2019). Risks are increasing in terms of the potential for disruption, so we will want to follow this closely.
Not surprisingly, fears of protectionism are also getting long in the tooth – but show no signs of abating. Trade delegations from the U.S. and China met last week to negotiate following the heated trade rhetoric between U.S. President Donald Trump and Chinese President Xi Jinping. Following these meetings, China made it clear that there is still a wide gap between the two countries. As I suspected, it appears that China made no material concessions. Let’s hope the can is kicked gently down the road, with no more inflammatory rhetoric or something much worse: additional protectionist actions that could disrupt markets. Kicking the can is what’s currently happening with the U.S.’ decision on whether or not to end the exemption on aluminum and steel tariffs for Canada, Mexico and the EU. That decision, which was supposed to come yesterday, was pushed out a month.
For a while now, I’ve been saying that the stock market’s spirit animal is no longer a bull, but a Chihuahua – a much smaller creature, but one that can make quite a bit of noise, jump up and down, and run in circles. With so much market noise in the air, the Chihuahua market continues to bark – and occasionally nip at investors’ heels.
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