Unloved Bull Markets

Chapter 4Economic Setting

Following a recession, economists describe the economy as usually going through two phases: recovery then expansion. Economic activity first recovers, sometimes slowly, other times with a surge. Then momentum kicks in and sets the stage for steady expansion (economic growth). Not this time! The post-2008–2009 recession economy was different and imperfect by historic standards and investors’ wishes.

Figure 4.1 shows quarter-over-quarter (Q-O-Q) rate of change in gross domestic product (GDP) from the first quarter of 2008 through the fourth quarter of 2019, which closely aligns with the end of the eleven-year bull market. What stands out first is the four sequential quarters of negative GDP, or contraction, third quarter 2008 through second quarter 2009. The first positive quarter-to-quarter growth to start the recovery was the third quarter 2009. For the twenty quarters (five years) beginning with the third quarter of 2009, three quarters were negative and six out of the twenty were .5% or less. The recovery struggled and momentum never kicked in to set the stage for steady expansion until middle to late 2016.

There are a variety of contributors to this imperfect recovery. The behavior of the Fed is one of them. In the next chapter we will show how the Fed stimulated growth of the money supply to promote recovery but then quickly slowed it down due to inflation fears. As we now know, those inflation fears were inappropriate. The Fed slowed the growth ...