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Long Story Short: Driving Factors of Continued Economic Expansion
Will the Market Surpass All-Time Highs?
At the start of 2019, the stock market saw one of its strongest first halves on record. The S&P 500 rose more than 17%, making it the best start of the year for the index since 1997. The markets have continued to rise in the 3rd quarter, even with trade tensions accelerating and the thought of a recession looming. According to the latest ABC News poll, 60% of Americans think a recession is coming in the next 12 months, resulting from declining global economies. Although many believe we will enter into an economic contraction, economists are confident the market will continue to hold out.
The Real Indicator. The yield curve has inverted a few different times this year, sending the media into a frenzy while confusing consumers. A few weeks ago, the 10-year Treasury note dropped below the yield on the two-year Treasury, but it only lasted three trading days. The real yield curve inversion, discovered by Duke University Professor Campbell Harvey, is the spread between the three-month bill and the 10-year note. This measure has correctly indicated the last seven recessions but must first be inverted for 11 to 12 months. During the entire second quarter of 2019, that curve was inverted, meaning any recession in the U.S. will probably not occur until the second half of 2020.
Rates and Trade. The Federal Reserve is going to do whatever it takes to keep the economy expanding. To stimulate the market, the FED may cut rates again; it uses this tool to achieve price stability and sustainable economic growth by increasing the money supply. Lowering rates will not “fix” the problem of a recession yet will help to avoid it for now. Trade tensions between the U.S. and China have been building for over a year now. Although the situation has taken its toll on both economies, investors are optimistic that President Trump will ultimately cave, rather than risk losing re-election. All economic factors affect the stock market, but these two combined could result in a profitable finish for the markets in 2019.
Business Cycle. With every economic expansion, there will naturally have to be a contraction, but that does not mean it will occur within the next year. The United States is currently in its 10th year of the longest expansion ever recorded, leaving consumers to believe a contraction is right around the corner. A recession is obviously harmful to the economy and investors, but the potential to make returns by monitoring the market still exists.
Growing for Now. Although the yield curve has indicated to consumers many times this year that we will soon be entering a recession, economists are confident the expansion will continue because of certain driving economic and political factors. The economy will inevitably contract, but for now, investors can expect continued growth.
https://www.marketwatch.com/story/3-powerful-reasons-the-stock-market-is-heading-even-higher-2019-09-12, Howard Gold, September 14, 2019
https://www.forbes.com/sites/investor/2019/09/11/is-a-greater-recession-inevitable/#4a13ceb75db5, Martin Fridson, September 11, 2019