Lessons From Prior Early-Expansion Scares

DEWITT, Mich. - Aug. 10, 2021 - PRLog -- The economy is on the upswing, unemployment is falling, inflation is rising, interest rates are low, and the stock market is up more than 60% from the most recent pullback. Sound familiar? The year is 1994. It's also 2010. And 2021¹.

Stocks touched new highs again last week, with the latest jobs report reflecting the broadly favorable fundamental backdrop. We think the music will play on for this bull market, but the experiences of 1994 and 2010 highlight the potential for the record to skip. Given the parallels, here are a few lessons for investors to consider:

Young expansions get scared from time to time. In 1994 it was a Fed scare. 2010 was scared by double-dip recession fears. At present, the rising delta variant, as well as rising inflation, has introduced the prospects for both to spook the market.

• 1994: After stalling in 1993, GDP growth picked up handily in 1994 (quarterly average of 4.1%), with unemployment falling from 6.6% to 5.5% over the course of the year. This was accompanied by a jump in inflation, with headline CPI rising from 2.3% to 3% between May and September. The Fed hiked rates six times in 1994 (and one more time in February '95), sparking worries that sharply tighter monetary policy would derail the expansion.
• 2010: Emerging from the depths of the Great Recession, the economy gained some steam, posting two consecutive quarters of 3%-plus GDP growth (which only occurred two other times during the '09-'20 expansion). The unemployment rate was declining from its 10% peak, but with still-historically high joblessness, a crashing housing market, fading fiscal rescue aid, and the lingering effects of the global financial crisis, fears of a double-dip recession emerged.
• 2021: GDP growth has averaged 6.4% in the first two quarters of this year, supported by significant improvement in the labor market. Last week's release of the July employment report showed a stronger-than-expected 943,000 increase in payrolls, the best month since last August and the second consecutive monthly gain above 900,000.  This drove a sizable 0.5% drop in unemployment, bringing the rate down to 5.4%. This is consistent with our view that economic momentum will be sustained this year by a healing labor market. At the same time, with wages increasing at a strong clip, investors shouldn't be surprised to see inflation worries – and the implications for Fed stimulus -- jump back into the spotlight. We suspect that concerns over the delta variant's implications for the economic reopening will prompt some anxiety around the pace of GDP growth as well.

Sources: 1. Bloomberg