Economic Expansion Is Old, but Age Is Just a Number | Capital Group

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Economic Expansion Is Old, but Age Is Just a Number

Concerns have arisen that the current U.S. recovery is long in the tooth, but the expansion continues to show that age is nothing but a number. In fact, the U.S. and other countries have enjoyed significantly longer expansions in the past. Although we are likely closer to the end of this cycle than the beginning, few of the imbalances that typically precede a downturn have emerged. Thus, there is reason to believe the expansion can continue.

A Tale of Two Economies: Strong Consumer, Weak Industrials

Sources: U.S. Census Bureau, U.S. Federal Reserve as of 10/31/16.

With wage growth accelerating, the job market tightening and household debt low, look for continued consumer strength in 2017. The U.S. remains a tale of two economies — with consumer strength partly offset by relatively weak, albeit recovering industrial activity — so expect modest growth. Uncertainty over the direction of the Trump administration may linger for months, but prospects for more infrastructure spending and other business-friendly policies could help the industrial economy.

Bargains Are Scarce, so Selectivity Is Key Cyclically Adjusted P/E Ratios

Sources: MSCI, RIMES, Thomson Reuters Datastream. Cyclically adjusted P/E ratios are the index price divided by the average of the previous 10 years of inflation-adjusted earnings for the 10 years ended 11/30/16.

Valuations for most sectors are meaningfully higher than their 10-year averages, most notably among traditional dividend payers, such as utilities and consumer staples. This is why selective investing is essential to uncover opportunities in individual sectors and businesses. For example, companies in oil exploration and servicing, like Chevron and Schlumberger, and other areas that have faced significant challenges, may offer potential value for long-term investors.

The views expressed herein are those of the author and do not necessarily reflect the views of everyone at Capital Group Private Client Services. The thoughts expressed herein are current as of the publication date, are based upon sources believed to be reliable, are subject to change at any time and should not be construed as advice. There is no guarantee that any projection, forecast or opinion will be realized. Past results are no guarantee of future results. This material is provided for informational purposes only and does not take into account your particular investment objectives, financial situation or needs. You should discuss your individual circumstances with an Investment Counselor.