A New Expansion?

The recent break of the 2022 high is hot on the newswires. And indeed it is a pretty big technical sign. After all, breaking through a significant "resistance" level can be a sign something has changed.

With new market highs, breaks above previous highs often mean a new "expansion period". I'm talking about multi-year gains with short drawdowns that are few and far between. The most recent example would be 2010-2018.

People are arguing that the rebound last year, and now into this year, has been the start of a new expansion. It very well could be. 2022 was certainly a notable drawdown year.

There are a lot of factors to consider when making an expansion declaration of course. And one I think that should be considered is unemployment.

We typically see expansions begin at unemployment highs, not lows. This is pretty straight forward in the chart below. So this is one reason I'm not comfortable declaring a new expansion at this point.

I'm sure I'll get some comments around why I drew lines through the last few years, so I'll go ahead and address it.

The Federal Reserve activist policy with QE and artificially low interest rates has created an asset bubble since the GFC. The Covid pandemic was an event anomaly that certainly impacted our entire world in significant ways.

Yet, the response was to triple down on the same activist policies and take them further into the stratosphere by adding massive fiscal stimulus. The result, at least in my opinion, is that we continue to be in the same regime that we have been in since the GFC, and thus, we are in the same expansion. And low unemployment is extending it.

The rise of inflation and interest rates may have changed that, but it too soon to tell as the consumer and markets are weathering those conditions much better than expected.