Slow-Growing Economy, Fast-Rising Markets:
Who Has Benefited Most?
The current economic expansion, which according to the National Bureau of Economic Research began in Q3 2009, is the third longest since 1945. However, it is also one of the weakest in terms of economic growth and activity.
Many factors have contributed to the slow pace of growth, such as the depth and severity of the Global Financial Crisis. However, financial markets have taken a much different path during this period, which has implications for all types of investors.
Through the end of Q1 2017, cumulative GDP growth over the last 31 quarters of the current expansion is just over 17%. Compare this to the 38% growth experienced during the 31-quarter expansion in the 1980s, and the relatively slow pace of the current expansion comes into focus. The monetary stimulus and record low interest rates that were policy responses after the 2008 global financial crisis have proved successful in stimulating the current expansion, but at a slow and gradual pace.
However, during this slow-moving U.S. economic expansion, financial markets have boomed. The S&P 500 is up more than 250% on a cumulative basis during the current economic expansion (through 3/31/17). This represents the second strongest bull market in history, surpassing the Reagan-Era boom of the 1980s.
The disconnect between the slow-growing economy and surging investment performance creates far-reaching implications. The current state of capital markets is one of rich valuations across virtually all asset classes. As markets continue their upward march, it puts stress on expected future returns. This affects how investors allocate capital.
For many, though, the impact is more personal. The fact that financial asset values have far outpaced real economic growth is contributing to the gap between the upper and other classes. Generally, the wealthier people are, the more their wealth comes from capital gains. Thus, wealthier people, and particularly the top 1% of earners, stand to gain from the bull market far more than others do.
Meanwhile, an extended period of low wage growth despite low unemployment means that many workers have not felt the benefit of the economic recovery where it is most needed — the paycheck. Perhaps that is part of the explanation for why the expansion has remained so anemic.