How long can the good times last? The longest economic expansion on record was the 1990s computer productivity driven 10-year (120 month) span. The current economic expansion, from June 2009 until now, is a 100+ month expansion driven by the Fed’s “Quantitative Easing” (over 3.5 trillion in treasuries and mortgage backed securities purchased from 2008-2014) and free money (near 0% prime interest rate for over seven years) policies. Very soon (in three months), the current expansion will overtake the 1960s expansion to take second place all time.
Some see no reason for the trend to end. Some are predicting another year of robust GDP growth, to over 3% in 2018 (vs. 2.3% in 2017). Some say that the only thing that would bring it all crashing down would be a drastic increase to the Federal Reserve prime rate of 1.5% (currently) to 4.5% or more by the end of the year. However, there are any number of challenges to the status-quo that could bring about extreme changes in the economy.
I believe that the economy stands on the edge of a knife, and that any significant event or even a multitude of minor issues could cause it to fall on one side or the other. The stock market has been booming since President Trump took office, and those that bet on him being able to get his tax reform plan approved have been handsomely rewarded. The Tax Cuts and Jobs Act has cut taxes on the highest corporate profits from 35% to 21%, a 14% increase in the bottom line of those companies. As the efficient market has priced in these effects across the spectrum of companies engaged in for-profit activities, what would happen if those companies disappoint? We will find out soon, as the first quarter corporate taxes have to be filed by March 15th for most companies.