'For better than never is late' - Geoffrey Chaucer, the yeoman's tale
Surprising though this may sound, this has been a difficult cycle for many investors. The harrowing experience of the last crisis left many reluctant, or simply unable, to risk their hard-earned capital again. The world economy’s unsteady revival from its most serious seizure in the post-war period has been persistently assailed by economists and experts alike. The same is true of the stock market’s incredible rally. From the sidelines, the impression to those so recently scarred by the plunging elevator of stock prices in 2008 must have been of an impending repeat. There has certainly been no shortage of proposed candidates for that next economic apocalypse – from the collapse of the euro to a so-called hard landing in China, there has been very little breathing space between imagined dooms.
In amongst all this of course, stock markets have fed off the more prosaic, and continuing, interaction between the learning curve and technological innovation – growth has continued, as it usually does, driven by the ever restless corporate sector. This growth has long been less reliant on central bank largesse than the widespread caricature, so its gradual removal does not faze us as it does some.
Even so, if this economic cycle were a human, surely it would be living beyond its life expectancy by now? In fact, we surpassed the average length of the post-war US economic cycle back in 2014. We are now only one more year from this being the longest US expansion in recorded history. The recent stock market jitters, fuelled by the spectre of less indulgent central banks and higher interest rates, only further the sense that the end must be near. Why not just wait for the next recession to get invested in stocks, you might think.
For some this may indeed be the right choice. Investing in stocks can be a hair raising/greying experience, even to the initiated. The end of this economic cycle is most likely closer than the beginning too. However, there are several important points to bear in mind for those stuck in this quandary.
First, measuring economic expansions in terms of years is simply not very helpful. Economic cycles are not human, even if their length is sometimes influenced by our frailties. The majority of recession triggers – whether they are oil shocks, financial crises, or war – are exogenous events, often random and unpredictable. Their occurrence is obviously totally independent of the length of an economic cycle. This ongoing bull market in stocks is a perfect example of both how difficult it is to work out which of the routine political tremors will turn into a cycle killer, and how unprofitable it is to get it wrong.
Despite the inherent difficulties in forecasting recessions, there are a number of historically reliable, but of course not infallible, indicators that can serve as an early-warning signal. The ISM manufacturing survey and the shape of the US yield curve stand particularly tall here. Short-term US interest rates have risen higher than their longer-term equivalent before every US recession since 1950 with a lead time of around one to one and a half years. The level of the ISM manufacturing survey has done a similar job over a similar period, but with a three-six month lead. Neither of these indicators are warning of impending doom, quite the opposite in fact. They, like the rest of our suite of indicators, are telling us the world economy remains some distance from overheating and may have several years yet before the next recession heaves into view.
We of course can only speculate about what that eventual recession looks like. However, we can probably take a little consolation from the fact that private sector seizures of the scale seen in 2007/08 tend to be the exception rather than the rule. There is simply no statistical relationship between the length of an economic expansion and the recession that ends it.
Investing is difficult. In the short run, the best times to get invested are when we feel least like it – when there is metaphorical ‘blood in the streets’, to borrow a phrase. Conversely, when it feels most comfortable, when even the gloomiest dismal scientists are happy – this tends to be the moment to trim risk exposure. However, that is really only the short run, and should not be seen as a way to manage your entire portfolio of assets. Being invested in a range of stocks, bonds, alternative trading strategies and commodities is generally going to provide you higher inflation-adjusted returns than you will receive from your bank account. The further into the future you are happy to look, the less you need worry about calling the next recession, the more you need to just put your cash to work and forget about it.
While history isn’t always a reliable indicator of what will happen in future, it does seem to tell us very clearly, that unless you think you can predict a recession within the next three months, on average you’ve lost out by not being invested. It could still be a long and painful wait for those out of the market, based on the indicators that we look at.