Gill Capital Partners 2019 Education Event Review
Thank you to all of our clients and partners who were able to attend our client education event last month. We were thrilled to be able to host Alex Dryden. Alex, Vice President and Global Market Strategist at J.P. Morgan Asset Management, is a fixed income specialist responsible for delivering timely market and economic insights to clients across the country. He is also a frequent guest on CNBC, Bloomberg and other major news outlets. Alex joined us from the UK, where he earned a degree in international business, Finance and Economics from University of Manchester in England. Alex is a CFA® charterholder, a CAIA® charterholder and has completed the Investment Management Certificate (IMC). For those of you who were able to attend, we hope you found him as entertaining and informative as we did. For those who were unable to attend, below is a summary of his main points and key areas of discussion.
Alex began his presentation with a review of where we are in the current growth cycle, how this growth cycle compares to previous cycles, inflation, and the jobs market.
Where are we in the economic expansion?
Alex referenced the two charts below, which compare the length and strength of all previous economic expansions in the U.S. since World War II. The chart on the left shows the length of U.S. economic expansions and recessions. As Alex pointed out, at 119 months, the current economic expansion is now the second longest on record behind that of the late 1990s economic boom, and the current expansion will quickly overtake that to become the longest expansion on record. However, his view is that the length of the expansion is only half of the story. The second chart shows the strength of those same historical expansionary periods. The current economic expansion is the light blue line on the bottom of the chart. While the current expansionary period, which began following the recession of 2008 & 2009, will become the longest running expansion in history, it has also been the weakest recovery. Alex compared the current economic cycle to that of a tortoise: slow and steady. In fact, the current cycle has produced less than half the cumulative GDP of the expansions of the 1960s and 1990s, as reflected in the chart.
Inflation & Jobs
Alex then shifted to his views on inflation. He expressed that we would generally expect to see signs of inflationary pressures at this point in the economic cycle, particularly given how low unemployment is (currently the lowest unemployment since 1969). He then outlined three key variables that explain why inflation has remained subdued:
1. Rise of the robot – Technological advancements have increased productivity materially over the past couple of decades, allowing businesses to produce good more cost-effectively.
2. Trade Unions – These same technological advances have led to reduced demand for unskilled labor in advanced economies; this has caused trade union membership to fall steeply, thereby reducing the bargaining power of labor.
3. Globalization – The globalization of trade has allowed businesses to shift labor and costs from one region to another to reduce costs.
The Federal Reserve
Alex briefly touched on the recent significant shift in Federal Reserve expectations. The Federal Reserve has raised interest rates 9 times since they began raising rates in 2015, and until recently the market expected the Federal Reserve to continue doing so. The market is now anticipating that the Federal Reserve will begin cutting rates this year, largely as a way to offset growing trade tensions. Furthermore, the low rate of inflation gives them cover to potentially cut rates.
Equity Market Valuations
Alex then moved on to discuss the stock market, and referenced a chart showing the S&P 500 Index since the mid 1990s. Alex noted that the chart looks scary on the surface because the current values look quite high. However, Alex asserted that the chart is not as concerning as it might look, and urges investors to look past just the nominal price level. When one “pops the hood and looks at the engine,” (i.e. earnings), they see that the current price levels are supported by strong quality earnings.
· Just because the current economic expansion will shortly become the longest in U.S. history does not necessarily mean that it cannot continue. The slow and steady nature of it could allow it to continue for some time to come.
· The current shift by the Federal Reserve from increasing interest rates to potentially cutting them could continue to give this “tortoise” of an economy a healthy shot in the arm to keep grinding higher, particularly if inflation remains low.
· While the stock market is at or near all-time highs, the current level of corporate earnings are supportive of the current prices.
Our team at Gill Capital Partners would like to thank Alex Dryden and J.P. Morgan for the engaging presentation. We would also like to thank those who were able to attend our educational luncheon, we hope you enjoyed the discussion and found it valuable.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.