A crash is coming, at least according to some experts, who claim that a steady bull market coupled with increasing volatility might foreshadow another financial crisis. However, an evaluation by Riverfront Investment Group observes that “while longevity and volatility often precede bear markets, they rarely cause them.” Instead, Riverfront highlights the following differences between the conditions which fueled the 2008 mortgage crisis and the economy’s current state as more indicative of a growing bull market.
Home/Stock Valuation Levels Have Not Reached an Extreme
As seen during the Dot Com crash in 2000, excessive asset valuations can lead to bubbles which, upon bursting, spawn a bear market. Like in 2008, today’s equity valuations surpass long-term trends, although not excessively enough to single-handedly usher in a sustained market decline. Riverfront points to the fact that housing prices are currently appreciating at a rate of about 5% per year, which doesn’t correspond with the annual appreciation rates that occurred in the years leading up to the 2008 housing bubble (10 to 20%). According to US census data, 70% of household wealth originates from housing. Therefore the crash of a housing bubble (which isn’t nearly as probable as in 2008) would likely have a greater overall impact than a burst caused by excessive stock market valuations.
Accelerating Economic Growth
Before the collapse of 2008, there was a general deceleration of growth, in both GDP and earnings. Riverfront highlights the fact that annual GDP growth rates progressively declined from 3.8% in 2004 to 1.8% in 2007, while rates have held relatively steady since 2010, with growth seemingly accelerating since about 2015. The annual growth of earnings per share among S&P 500 companies has also accelerated in recent years, as opposed to the consistent slowdown which began two to three years prior to 2008.
Monetary Tightening Isn’t as Severe
While the Fed has raised rates five times since 2018, their reasons for doing so–and the economic factors that determine those reasons–aren’t the same as pre-2008, according to Riverfront. The Fed raised its funds rate 17 times between 2004 and 2007 (up to 5.25%), in an attempt to combat an inflation rate swelling to almost 3%, and diffuse a housing bubble, in which appreciation rates soared above 15%. In contrast, today’s annual inflation rates have held at around 2% over the past few years, and at 5%, housing appreciation rates are lower as well. While a tightening funds rate can spur a recession, Riverfront believes that the Fed’s recent rate changes were meant to offset the accommodations enacted to stave off the 2008 housing crash, and that any upcoming increases still won’t exceed the stringency of the pre-2008 hike.
Riverfront does recognize that somewhat unpredictable “shock factors” such as the start of a massive trade war could spur another recession. However, they believe that both the administration and our country’s trading partners would rather avoid such an outcome, since it benefits no one. As proof that concerns about a trade war are likely unfounded, Riverfront cites the bond market’s tightening credit spreads, as well as the fact that today’s consumers have less debt relative to disposable personal income, and banks have more capital at their disposal than in 2008.