CNBC has had a virtually endless commentary regarding the current market decline and last week listed the following fears of investment managers: 1-Trade War; 2-Fed/Tightening; 3-China Slowdown. I would like to add the prospect of an end to the current economic expansion precipitated by any or all of the above to the list. A interesting CFA article listed below gives some compelling (in my view) reasons for continued expansion of the US economy.
In a CFA Institute article written by Mark Ambruster, CFA, titled The US Economy: Eight More Years of Expansion, published in late September, Ambruster argues that because the US economy had its steepest decline since the great depression during 2007-2008, it should be followed by a steep recovery, yet this recovery is diverging from historical patterns. He argues that this recovery is very tepid, among reasons “(because)…..policy uncertainty hit record highs…large financial penalties were levied against those deemed at fault”. Because of recent regulatory rollbacks among other factors, “…things are turning around”, other factors being a tax cuts plus repatriation of corporate profits.
Economist Brian Wesbury had similar arguments and called this past recovery a “plow horse economy” and listed policy uncertainty among the reasons for the past stagnation.
Ambruster further argues that if this expansion just reached the average rate of past recoveries “it could mean another three years of economic expansion”. Lastly, he says that if the US economy experiences recoveries similar to the 1960s, expansion could extend further.
Using I/E/B/S/ Reuters forward projections, 2018 S&P 500 operating earnings (data as of October 19) are set to rise by 23% and for 2019 by 10%. The p/e has dropped to 15.8, about the lowest level since 2015, based on 12 month forward projections, and for the midcap S&P 400, the lowest level since 2012-13.
Robert J Voccola, CFA