We’re closing in on the end of the year, and some market watchers are surprised that the momentum has continued on for yet another year. Analysts and economists have been debating the timing of the next recession for quite some time, as it seems to be overdue, but despite that, this isn’t even the longest bull market, or at least not yet.
Economic expansion stretches into third longest bull market
Goldman Sachs analyst Allison Nathan and team compiled a special edition “Top of Mind” report focusing on this year and looking ahead into next year. They said the current U.S. economic expansion has lasted 102 months as of this month, which makes it the third longest bull market so far in U.S. history.
Of note, they were using the economic expansion to measure the length of bull markets, but if measuring for the longest bull market according to equities, we’re in the second longest bull market without a decline of at least 20% in the S&P 500.
They also pointed out that growth this year has ended ahead of expectations, marking the first time in five years that this has happened. Goldman’s U.S. Current Activity Indicator stood at 4% for November, while it ranged between 3% and 4% for most of this year. The analysts also pointed out the U.S. labor market is also closing out the year with a bang as payrolls grew 228,000 in November and unemployment fell to its lowest level in almost 17 years.
No end to the bull run?
Meanwhile, there seems to be very little in sight to suggest that this current expansion stretch won’t continue until it actually becomes the longest bull market. The S&P 500 has been climbing higher and higher, setting new records on a regular basis for much of this year. Volatility has also been hovering at low levels all year, and investment-grade and high-yield credit spreads recovered quickly, resuming their tightening trend after some brief pressure.
Emerging market equities began to pull back recently, but in spite of that, the MSCI EM Index is still up by almost 30% since the beginning of the year.
Is the end nigh?
There are some signals that are making some market watchers antsy, however. For example, the U.S. yield curve is still flattening, and last month marked the first time in about 10 years that the spread between the two-year and 30-year yields fell under 1%. Traditionally, when the yield curve flattens, it’s a sign that the economy is about to slow down, but the Goldman team feels that the growth outlook for the country is still solid.
Stock prices also explain why so many analysts and economists are calling the impending end of what’s one of the longest bull markets by any measure. The Goldman team pointed out that balanced equity-bond portfolios are nearing the age of the longest bull market in more than 100 years, driven by the so-called “Goldilocks” scenario, which is strong growth combined with low inflation.
There’s also the problem of rarity, as it’s rare for valuations to be elevated across stocks, bond and credit.
The longest bull market in a century?
The Goldman team still sees room in the economic expansion in 2018, driven by reconstruction after the hurricanes and tax cuts. They expect the growth momentum to continue into 2018 “before slowing thereafter.” They predict 2.5% growth in gross domestic product next year and 1.8% growth in 2019.
They also expect the unemployment rate to continue falling to 3.5%, which would be a dramatic switch from what was the weakest labor market in U.S. history following a war to one of the tightest labor markets in one cycle. If the expansion continues into 2021, they believe the Fed will try to tighten just enough to keep the market from overheating and to raise the unemployment rate slightly. At that point, the risk of recession would climb dramatically, they added, especially if the labor market has moved past full employment.
For now, they see a greater risk of correction rather than recession because the growth momentum has remained robust and none of the key indicators for recession risk is “flashing red.” Goldman sees potential drivers as a “shift in market psychology” or a glitch such as the crash in 1987.
