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This Business Cycle IS Different

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In recent U.S. macro data, I noted two very important U.S. business cycle points. First, one of the biggest sources of support for the S&P500 --now trading at a lofty forward 12-month P/E ratio of 17.5-- is the paltry return coming from risk-free U.S. Treasuries. That latest P/E ratio is well above the 5-year average (15.5) and even further above the 10-year average of 14.1. 

The logic: An investor sitting on a pile of cash cannot make more than 3% by holding U.S. 10-yr Treasuries in 2015 and 2016.  And it is looking to get much, much worse for these risk-averse types in 2017, 2018 and 2019, as the Fed raises short-term rates.

Here’s the latest forecast—

During 2015 and 2016, the S&P500 made annual returns of +1.4% and +12%. Even counting the lousy year of 2015, an investor averages +6.5% returns on a plain vanilla S&P500 index fund each year. YTD for 2017 is showing the S&P500 up +11.3%.

What’s my first point? Stocks are going to be the only place to be for another 2 years, or until the U.S. sees an actual downturn in output, ending this expansion.

The second point I want to make comes NOT from the U.S. unemployment rate. That data is benignly quoted in news as frictional at 4.4%. However, take a look at what is called the DURATION OF UNEMPLOYMENT. In the past 10 business cycles, going from 1950 to 2010, you can see. The average duration of unemployment never got higher than 20 weeks during the worst period of ANY recession.  What of today? After nearly 9 years, it still stands at 25 weeks! 

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