There were reasons for the fear. The trade war intensified during the summer; the European Union’s manufacturing sector fell into recession; long-term bond yields went negative in much of the world; and the U.S. Treasury yield curve inverted in what is usually a sure-fire indicator of an imminent slump. This was enough to “create a recession in the minds of most,” as Leuthold Group’s chief investment strategist Jim Paulsen put it. Hence the unambiguously strong employment data for November — published at the end of a week which had also revealed plenty of data suggesting a recovery in global manufacturing — feels almost like exiting a recession to many investors. The reality is, as in 1998, the U.S. economy has remained strong throughout.
The 1998 analogy cuts both ways. The economic recovery carried on for a while, and late 1998 proved to be a great time to buy stocks. The problem was that this soon turned into an economic over-heating, prompting the Fed to begin a series of rate hikes in May 1999. And of course anyone who bought stocks needed to be prepared to sell them quickly.
Even though economic misery is near all-time lows, then, we will probably soon start questioning whether the Fed cut rates too much. And while the conditions seem good for a Goldilocks boom in share prices, the Fed has cut at a point when stocks already looked very expensive (in another echo of 1998). Just as in 2000 (also a presidential election year), we can expect questions about asset-price bubbles in 2020.
John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books.