So, is the end nigh?
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.
In among this, 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.
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.
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.
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.
:: Jonathan Sloan (firstname.lastname@example.org) is a private banker at Barclays Wealth & Investment Management