The Decade Will Come To A Close Setting An Economic Record
The National Bureau of Economic Research (NBER) is the institution that officially determines the peak and trough of the U.S. economic expansion. In other words, they establish when the economy enters and exits an expansion and recession.
According to the NBER, the last recession began in December 2007 and ended in June 2009, marking the conclusion of the worst economic contraction since the Great Depression of 1930. The U.S. economy has been in expansion ever since the summer of 2009 and will close out the decade without a recession. This marks the first time a recession has not occurred in any decade going back to 1850 when the NBER began to collect data.
What does this all mean for the new decade that will commence in only a few weeks? The short answer is that nobody knows for certain; however, it would be premature to conclude that a recession must happen just because it has not occurred in the last 10 years. Just like it was flawed to conclude back in 2009, that the bad times would persist into 2010 because we had just exited the Great Recession. Unfortunately, many professional money managers and investors made the error of getting too conservative at that time and missed out on strong returns. As of Thursday’s market close, the 2010 decade has returned 249% Total Return for the S&P 500 and 246% Total Return for the Dow Jones Industrial Average.
Although nobody knows what will happen in 2020, we can turn to the forward price to earnings (P/E) ratio to provide some guidance if the market is overvalued. At the start of the decade (2010), which will go down in history as providing one of the best returns for the markets, the forward P/E was 18x, slightly higher than today’s P/E ratio of 17.5x. Comparing today’s P/E to the overvalued dot com era, we can observe that we are nowhere close to the 26.4x P/E ratio experienced at that time. Both comparisons seem to suggest good results for the upcoming decade.
Our economy still has steam, and as we wrote in last week’s Market Update, the consumer is strong and should continue to be the driving force for positive GDP growth. The job numbers for November were released last Friday, and to quote Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania, “When I was glancing at my screen and those numbers popped, I said, whoa. Another whoa just like last month.” He was referring to the monthly job numbers that came in much higher than consensus estimates.
The Surevest Investment Committee continues to monitor the data as it is released, and so far it continues to be positive for the U.S. economy and stock market.