Impeachment, a Coming Election, and a Near-Record Market Rally: What Could it Mean for 2020?

As Mark Twain once said, history never repeats itself, but it does often rhyme. The House vote to impeach President Trump coming in mid-December of 2019 certainly feels like a couplet with the Clinton impeachment, which occurred in mid-December 21 years ago. Indeed, there are similarities, but also key distinctions.

Two key drivers of solid markets and economies existed then as now—low inflation and low unemployment. But that’s where the similarities end. At the beginning of 1999, markets and the economy still had over a year of good times to go, but the seeds of the equity market correction in 2000 and the recession in 2001 were being sewn, in the form of excess. The S&P was trading at a price-to-earnings ratio (P/E) of 28, an extremely high multiple, and gross domestic product (GDP) growth registered an extremely hot 4.5%. The S&P 500 today is trading at a P/E of less than 22, but in a much lower interest rate environment. And the long but muted recovery from the Great Recession has yet to overheat the economy.

The price-to-earnings ratio (P/E) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

Capacity Utilization: A Canary in the Coal Mine

Capacity utilization is the relationship between what we produce and what we could produce if our full manufacturing and production capacity were used—and it’s a valuable marker for recession. The tipping point for recession has historically been when capacity utilization rises above 80, as was the case in the last four. With capacity utilization now at roughly 77 (readings above 85 or below 75 are rare extremes), recession risk would appear to be low. Could this time be different? Sure. Capacity utilization is a measure of manufacturing capacity, and in prior periods where manufacturing loomed larger, a 77 reading could have been seen during a recession. Today, the strong consumer sector is supporting modest GDP growth, and with little signs of inflation even from a tight labor market, it’s tough to find any signs of overheating that would trigger the next stage of the business cycle.

Capacity utilization refers to the manufacturing and production capabilities being used by a nation or enterprise. It is the relationship between the output produced with the given resources and the potential output that could be produced if capacity was fully used.