By John P. Calamos, Sr.
I am often asked when a recession will hit the US economy. People fear that since we have been in this current phase of expansion for nine years, the end is fast approaching. While this expansion is unusually long, it is not unprecedented. In 1991, the US economy began an expansion that lasted 10 years. Moreover, this phase of growth was exceptionally shallow. As shown in Figure 1, the annualized change in GDP was only 2.2%. This is lower than the growth rates we have seen in previous expansions and suggests that we should view this cycle from a different perspective.
Figure 1. The current expansion in the United States: long duration, small scale
Source: Calamos Investments using data from the United States Bureau of Economic Analysis. Billions of chained 2009 dollars, quarterly GDP.
Think of this economic expansion as more turtle-like than hare-like. Slow, steady growth may not be exciting, but it can be more sustainable. At present, there is little to suggest that the end of this economic cycle is imminent. There is a lot of economic data that is trending in a positive direction. Everything indicates that corporate earnings announcements over the next few weeks will be strong. Job growth remains strong and house prices are rising. Tax reform and deregulation provide long-term tailwinds for businesses large and small. Corporate share buybacks and mergers and acquisitions activity were strong. The Fed is raising rates, but these moves have remained gradual and widely expected. Inflation is on the rise but not out of control. Moreover, although this current GDP expansion began in 2009, it has largely been limited to high-income households. As middle- and low-income households strengthen their position, consumer activity may help prolong the expansion.
Figure 2. Improving middle- and low-income balance sheets can support U.S. economic growth
Source: Empirical Research Partners using data from US Census Bureau, Empirical Research Partners Analysis. 2001 to 2017 E (2001=100) Real household income by quintile is in 2016 dollars.
Any discussion of the health of the US economy these days leads to the subject of tariffs. Tariffs are a big concern, and I expect short-term disruption in markets and in some industries. Even so, I don’t foresee a deep and protracted trade war. I believe Washington simply wants a fairer footing in the global economy for American businesses and intellectual property protection. The rhetoric was impassioned, as is often the case in ultimately productive negotiations. Turning a blind eye to trade imbalances and intellectual property rights would be to abandon the proverbial bogus, and that’s not something an economy can afford.
Asset Allocation Thoughts
While I believe the US economy is positioned for continued growth, that doesn’t mean I believe investors should put their asset allocations on cruise control. It always makes sense to make sure your portfolio is well-diversified and positioned not just for the current environment, but also for the road ahead. This is particularly important now due to the magnitude of the change in the investment landscape in 2018. After an unusually long period of subdued volatility, we have seen a return to more typical conditions. Against the backdrop of a maturing business cycle, interest rate hikes and political wrangling, volatility is unlikely to return to abnormally low levels.
However, there are still plenty of opportunities – especially for active managers who can rule out short-term noise. In particular, we continue to identify opportunities among growth-oriented stocks. Convertible securities are also well positioned for a rising rate environment: Historically, they have been more resilient when rates rise compared to traditional fixed income securities. Finally, alternative strategies can be a good choice for diversification and achieving income goals in an environment where higher quality bonds face headwinds and equities are more volatile.
Past performance is not indicative of future results. Opinions are as of the date of publication, subject to change and may not materialize. The information is provided for informational purposes only and should not be considered as investment advice. Equity securities fluctuate with changes in a company’s financial condition and general economic and market conditions. Convertible securities involve interest rate and default risk. The alternatives carry additional risks and may not be suitable for all investors.
Active management, asset allocation and diversification do not guarantee investment returns or eliminate the risk of loss.