Evans Wealth Management Blog

Articles written by Evans Wealth Management are designed to educate clients & potential clients on concepts important to their financial future.

One for the Record Books!

Barring some unforeseen event, the current economic expansion will become one for the record books next month. According to the National Bureau of Economic Research, the expansion beginning in July, 2009 has run exactly 10 years (120 months) matching the 1990’s expansion as the longest on record. By the end of July, it will have broken the record.

Image result for record breakingWhile the current expansion is the longest on record, it has also been the slowest since at least World War II according to the St. Louis Federal Reserve.

Economic booms such as the one we are currently enjoying can encourage risky behavior. Consumers can take on too much debt. Businesses can over-invest and build too much capacity. Investors can become over-confident and drive the stock market to unrealistic levels (late 1990’s) or speculation can run rampant in the housing market (late 2000’s).

With this as a backdrop, it seems appropriate to remind ourselves expansions don’t die of old age. They are triggered by various events. Below is a reminder of some of the most common causes of economic downturns.

  1. Rising inflation leads to rising interest rates. In the early 1980s, the Federal Reserve pushed interest rates to historically high levels in order to snuff out inflation. The Fed’s policy prescription succeeded but, led to a deep and painful recession.
  2. The Fed can miscalculate. A policy mistake can be the trigger, for instance if the Fed raises interest rates too quickly and restricts business and consumer spending. This is a derivative of point number one.  There were fears the Fed was headed down this road late last year. Credit markets tightened, and investors revolted until the Fed reversed course.
  3. A credit squeeze can suppress growth.In 1980, the Fed temporarily implemented credit controls that briefly tipped the economy into a recession.
  4. Asset bubbles burst. The 2001 and 2008 recessions were preceded by speculative excesses in stocks and housing.
  5. Unexpected financial and economic shocks jar economic activity. The OPEC oil embargo in the 1970s exacerbated inflation and the 1974-75 recession. The tragedy of 9-11 jolted economic activity in 2001. Iraq's invasion of Kuwait pushed oil up sharply, contributing to the 1990-91 recession. Such events don't occur often, but their possibility should be acknowledged.

The silver lining in today’s environment is the lazy pace of growth experienced these last 10 years. Slow and steady appears to have prevented excesses from building up in much of the economy. As long as investors remain skeptical and cautious, the odds of enjoying continued economic prosperity are good.

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