Pro Perspectives 2/13/20

February 13, 2020

Let’s step back from the day to day noise of newswires, and journalist opinions on infectious disease, and revisit what is an exciting outlook for stocks and the economy.

Remember, along the way last year, we were looking for a repeat of 1995, where the Fed was forced to reverse course on interest rates.  We got it.  And we got a big outcome for stocks.

And with that flip-flop by the Fed, we’ve talked about the prospects of seeing another big late 90s-type of run for stocks and the economy.  After the Fed cut rates in July of 1995, the economy went on to average 4.5% quarterly annualized growth through the end of the 90s.  Stocks were up big every year through 1999, with an annual average return of 26%.

Remember, we never had the big bounce back in growth, following the Great Recession.  Historically, significant economic downturns are followed by a big bounce back in growth.  For the 10-years following the Great Recession, the economy has grown at right around 2% annualized.  That weak recovery has left the U.S. economy about $4 trillion smaller than it would be had we returned to the path of long-term trend growth (3%).  This outlook of another late 90s boom would be a needed “catch up” for the U.S. economy.

So, with this in mind, we are in the midst of the longest economic expansion on record.  As Bernanke has said, “economic expansions don’t die of old age, they tend to be murdered.”  The Fed kills them through aggressive tightening, in fear of getting behind on inflation.

The good news.  That seems unlikely this time around.  For the Fed’s part, Powell has made it clear that there will be no rate hikes until it sees significant and sustained inflation above its 2% target.  That should be the formula for a boom period.