In search of reasons for why all the major asset classes have been on an extended bull run, Justin Lahart in today’s Wall Street Journal (subscription required) raises the possibility that smoother, kinder and increasingly gentler economic cycles are the source of the good times.
“The economy doesn’t rock ‘n’ roll the way it used to,” he wrote. And indeed it doesn’t. Recessions are less frequent intrusions, and when they do arrive they tend to be less severe compared with the contractions of generations past.
A forthcoming paper in The Review of Financial Studies explains that declining macroeconomic risk, or the volatility of the economy, may account for a lower equity risk premium. In other words, stock prices are higher than they otherwise would be if recessions were more common and took a bigger bite out of the economy.
The idea that things have fundamentally changed is hardly new, especially when it comes to finding cause for predicting that bull markets will run longer. Unfortunately, the advice is often tainted with failure. One of the more infamous examples came on the eve of the 1929 stock market crash, when Professor Irving Fisher of Yale counseled that equities had reached a “permanently high plateau.”