Finding Good News in Slow Growth

Many analysts are misreading the economy because they assume the future will be just like the past.

Many analysts say it’s time for a downturn because we’ve had a very long expansion and bull market and the Fed is tightening the money supply. The combination usually leads to a recession and a bear market.

Yet, many characteristics typical of the late stages of an economic cycle are missing, and these missing factors are what really lead to downturns. As the saying goes, bull markets and economic recoveries don’t die of old age.

Many people complain that this economic recovery has been characterized by much slower growth than past recoveries. That’s true, but while there are reasons to complain about slow growth, there also is some good news in a slower-than-usual recovery.

The economy doesn’t have the usual signs of overheating. Debt isn’t rising to extreme levels. Inflation is below the Fed’s target and has declined the last few months. Households and businesses have restrained their spending and investing, though some businesses have taken advantage of low rates to maximize their borrowing. With the exception of some sectors of the stock market, asset prices rose at modest rates.

We don’t have many signs of excesses because business and household spending have been supported mostly by income, not debt. That’s a sharp contrast to the boom before the financial crisis.

We also have broad-based growth. The economy isn’t dependent on one or two sectors, and no sectors are overheating. Also, unlike a few years ago, there aren’t significant sectors detracting from growth. Manufacturing, energy and commodities are recovering from their downturns. The weakest part of the economy is autos, and that weakness only appeared recently.

Because there are few signs of excess, the Fed isn’t under pressure to tighten policy quickly. The growth also appears to be self-sustaining. This level of growth can continue for a while.

Europe and the emerging markets are behind the United States in the cycle, so they should be farther from a peak.

Europe’s growth has been better than expected the last couple of years, and that’s slowly being reflected in stock prices. European stocks are less of a bargain than a couple of years ago, but they still are better values than U.S. stocks and have a lot more room for growth.

The emerging markets also have more growth potential. They’re bouncing back strongly from their bear market that ended in 2016. More recently, the Latin American markets recovered from the sharp drop in June caused by political events. The rally in commodities also is helping the Latin American markets.

Of course, there’s always a risk the Fed or other central banks will tighten too much, triggering market declines. But they seem to be aware of the dangers. Low inflation and the lack of excesses mean they aren’t under pressure to raise rates too rapidly.

The greatest risks to your investments right now are from outside the markets and economy, what the economists call exogenous risks. These include wars, trade wars and other mistakes by policymakers and politicians. The most imminent risk probably is that Congress won’t raise the debt ceiling by its September deadline, perhaps causing the U.S. government to default on debt or fail to make other payments.

These risks are one reason we aren’t taking big risks in our portfolios.

They’re also why we’re diversified and are adding gold and commodities to the portfolios this month, as explained in the following Portfolio Watch section.