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May 28, 2015 at 11:10 AM
As 2015 nears its halfway point, MFS released a midyear outlook to examine the longevity of the current business cycle, the potential interest rate rise, consumers’ reasons for not spending and the big thing investors missed this current cycle.
MFS hosted an investment roundtable on Wednesday in New York with its chief economist, Erik Weisman, and its chief investment strategist, James Swanson, to talk about four factors driving the markets for the rest of the year:
1. This Business Cycle’s Longevity
This July will mark the sixth anniversary of the current business cycle. According to Swanson, the average cycle lasts five years.
So when will this business cycle end? Both Swanson and Weisman believe this cycle has the potential to be longer.
“It could end at any time because there are an awful lot of potential external shocks,” Weisman said.
But, he added, “We’re not seeing the things that we would typically be worried about if we were thinking that this business cycle was about to come to an end.”
Weisman says the things that typically end business cycles are “excesses” – excesses in capital, labor, inventory, inflation and credit.
“For the most part, we’re not seeing those excesses,” Weisman said.
An excess in capital would mean overinvestments or poor investments, an excess in labor would mean the labor market is too hot and there’s rising wage growth, and an excess in inventory would mean there’s a large buildup that needs to be worked off.
Excessive inflation would mean that there are bottlenecks in the product markets, while excessive credit would mean that financial balance sheet leverage is rising to worrisome levels.
“Yes, we have credit excesses, but that’s nothing new,” Weisman explained. “I don’t see overinvestment; I bet there’s some misinvestment, misallocation of resources with interest rates so low. Certainly there’s still an awful lot of slack in the labor market; some of that’s in the shadows. Inventories are up a little bit, but I still think they’re historically low. Obviously there’s no consumer price inflation to be seen although there’s a lot of asset price inflation.”
2. Investors’ Big Mistake
“The average American we know did not invest in the equity market in this whole cycle,” Swanson said. “The net worth of the 90% of bottom earners of the United States in real terms has fallen during this business cycle. One of the reasons for that is they didn’t invest in the equity market, and there are perhaps some reasons why this happened.”
The Standard & Poor’s index is up more than 200% in this business cycle, and bonds are up 30%, according to Swanson.
“So, people that invested in bond funds – not money market funds but bond funds – have seen their asset values rise about 30% since the end of the last recession,” Swanson said.
The hesitance of Americans to invest in stocks was “Very different than any other cycle except if you go back to the Depression,” he said. “So, clearly, behavior changed during this period.”
Swanson believes that some of the negative investor sentiment was caused from the headlines about U.S. GDP during this cycle.
He explained, “Every night on the news, particularly during the election, the government and politicians would say: ‘This is an abnormally slow cycle. This is not good. This is slower than usual. You can look at job growth; you can look at GDP growth.’”
There was something else happening, Swanson said, that no one else was looking at.
