Facts do regularly defy expectations in our complex economy, but expectations can and do also create facts. Thus, perhaps it does pay to be positive, in the long term especially.
Recession in the U.S. economy is unlikely this year, and the current expansion – now 10 years old and the longest in history – could easily continue through most of all of 2020, according to Mark Hoffman, managing director, head of portfolio management and analytics at PNC Asset Management Group.
When recession does come, the primary cause is likely to be … expectations, negative expectations that then create facts.
“We think this is going to be a positive year,” Hoffman said. While recession will occur eventually, he listed why PNC’s economic team forecasts it won’t be this year:
• There is no “bubble” of overexuberance in real estate or stock prices.
• Consumer confidence is positive and consumers have money to spend.
• U.S. economic growth of near 2.5 percent recently is based on solid activity and not a tax cut “sugar high.”
• International Monetary Fund predicts global growth of 3-plus percent.
• China most recently reported a controlled-slowing 6% GDP growth rate,
• Federal Reserve leaders say any further interest rate increases will be “data based” rather than to arrive at a number that seems to sound good.
Hoffman does arrive at an investor strategy for 2019 (maybe longer?) when he overlays this perspective with historic trends dating back 125 years, which he said decisively shows that there is greater risk in investing too conservatively rather than too aggressively. He counsels that wise wealth investors should keep plenty of assets in stock markets, but they should switch assets from aggressively managed funds to defensively managed funds as this expansion cycle plays out its late innings.
Hoffman spoke to PNC Wealth Management’s Kentucky leadership and several dozen clients late in the first quarter of the year in Lexington and said that all expansions do come to an end. This is an inescapable truth. But the observable economic forces and trends at work presently point to continuing slow growth.
Ironically, when recession comes it likely will have been triggered by the psychological consequences of the current economic expansion having lasted so long. As the present growth cycle ventures further into record-length territory, business decision-makers grow more wary of making capital expenditures and investments – a new store, factory, product or fresh hires – because the result of the outlay might come online just as a recession does in fact arrive.
Hoffman is a numbers man. Prior to entering wealth management portfolio analysis, his education included astrophysics and physics bachelor’s, master’s and Ph.D. degrees at Yale and the University of Chicago. That level of achievement is rare. Astrophysics and physics math is essentially gathering and analyzing data to make reliable determinations about what one can expect to happen.
Consequently, he looked at the total long-term investment return of putting assets into the collective stock market from 1893 to 1993, a century of monumental change encompassing the rise of electricity, the automobile, flight, income taxes, world wars, multiple small recessions and the Great Depression. Stocks gained 6.5% annually.
And Hoffman looked at the overall investment returns of the collective stock market from 1993 to 2018, a quarter century of further monumental change encompassing the rise of the internet, a dot-com boom and bust, 9-11, China’s economic ascent, the Great Recession and a 10-year recovery. Stocks again gained 6.5% annually.
Hoffman said he looked also at the investment returns of putting assets into the bond market, again during the century from 1893 to 1993 and the quarter century from 1993 to 2018. Again those assets produced equal long-term results, a return of 0 percent.
Of course, individual years can and do see a stock portfolio fall and a bond portfolio rise, by double-digit percentages even. And the short-term strategy is important when it is time to use those assets – for retirement, acquiring real estate, or buying or expanding a business.
But a long-term investor’s strategy is clear: Keep thinking positive thoughts. ■
Mark Green is executive editor of The Lane Report. He can be reached at [email protected]