When The Fed increased rates on June 13 for the second time this year, they left the door open to more rate hikes before the end of the year, and opened the proverbial can of pundit worms. How many more raises will come? How high will they go? Will the economy continue to grow? What is sustainable?
To get some perspective, let’s look at some historical facts and some recent economic trends:
· Unemployment has fallen every year since 2009, and now currently stands at 4.1%.
· 4.1% unemployment is the lowest rate since 3.9% in 2000.
· The lowest recorded unemployment rate was 1.2% in 1944; the highest was 24.9% in 1933.
· The Federal Reserve likes to aim for the “sweet spot” of between 2 – 5% when setting the federal rate. It is currently 2%. They have signaled that rates will be 2.5% by the end of this year, 3% in 2019 and 3.5% in 2020.
· The lowest rate ever was 0.25% in 2008, the 10th such cut in just over a year. Rates did not go back up until 2015. Since then, they have steadily climbed.
· The highest rate ever was 20% in 1979 and 1980 to combat triple-digit inflation. The rate has not been in double digits since 1984, when it hit 11.75% before dropping again to 8.25% by the end of the year.
· The Dow hit 20,000 for the first time in January, 2017. It is well over 24,000 in July of 2018.
· The all-time low since its inception in 1885 happened on July 8, 1932 (41.22).
· In 2009, the Dow bottomed out at 6,443.27; it has nearly quadrupled in value over the subsequent nine years.
· January, 1966 saw the Dow hit 7,781.53, a number it would not reach again until October, 1995.
· Between 1974 and 1980, inflation hit double digits in three separate years. The only other time the country experienced double-digit inflation was in 1946, the highest rate since recording, at 18.1%.
· Inflation has stayed at or under 4.1% every year since 1991; in 2017 it was 2.1%.
· According to Wikipedia, there have been 13 recessions since the great depression ended in 1933, approximately one every 6.5 years.
· The Great Recession of 2007 – 2009 lasted 18 months, the longest recession since the Great Depression.
Remember all the chatter about the stock market hitting 20,000? People made hats that said “Almost 20,000” it got so close so many times. And then it happened. That was 18 months ago. One and a half baseball seasons later, and the market has risen another 20%.
I think we can all agree that this kind of growth is not sustainable. We are currently in a flow pattern, but an ebb surely awaits somewhere. History suggests that we are even overdue at this point (9 years since last recession) for a setback. The question is not will another recession hit; the question is how severe will it be when it does?
On this, we can only speculate. But for now, the markets are strong, unemployment is low, inflation is reasonable. Most experts agree that we are probably looking at two more rate hikes before 2018 checks out. This seems to keep us on an upward trajectory; so for now, sit back and enjoy the ride.