The familiar admonition, “Be careful what you wish for, lest it come true,” is age-old and universal, having been told in many forms throughout history from Greek mythology, to Chinese proverbs, to great works of English literature. Despite this inherent knowledge in our collective memories, it is simply human nature to ignore such advice and constantly strive for more. After all, who wouldn’t want everything they touch to turn to gold? But this over-reaching tendency has often contributed to the end of many economic cycles, as risk-taking leads to unsustainable excesses that ultimately unravel, tripping conditions into recessionary outcomes.

As we find ourselves in the midst of the tenth year of this current economic cycle, with unprecedented stimulus coming from a combination of lower corporate tax rates, favorable overseas cash repatriation terms, historically low interest rates, easing regulation, and increasing fiscal spending, it might help to pause and consider the classic lessons of fables and recognize that the pieces have been put in place to essentially encourage excessive risk-taking. Where it will lead is still uncertain.

By many measures, though, economic data suggests that we are still enjoying the benefits of economic wishing, without the letdown of the “lest it come true” part. Following a mild slowdown during the first quarter of this year, GDP growth has re-accelerated and employment growth has resulted in the number of available jobs exceeding the number of unemployed workers for the first time in history. Inflation, though picking up, remains mild; and the Federal Reserve has rightly continued to raise interest rates at a measured, well-telegraphed pace. Even the more extreme “left-tail” type of threat of a military conflict with North Korea has softened materially – an outcome many would not have envisioned just a few months ago in such a politically charged environment. For now, this economic expansion appears poised to continue, and there are few apparent signs of excess beginning to build. However, in the past, extremes have seemed to accumulate with little warning. While no two economic cycles are ever exactly alike, the last two business cycles do suggest that there were troubling signs brewing well before the stock market faltered and recessions occurred.

In December of 1996, Federal Reserve Chair Alan Greenspan made his now famous observation about “irrational exuberance” in the stock market. At that time, the S&P 500 had appreciated over 100% from its lows of 1990. But his implied warning proved to be premature, as the subsequent four years delivered growing access to the Internet that changed daily life for most Americans and led to GDP growth in excess of 4% per annum. Start-up Internet companies were being funded and going public with little regard to their profitability as economic and investment momentum continued. Perhaps the most notorious example of excess back then was the IPO of online pet retailer Pets.com in 1999. During its first fiscal year, the company earned just $619,000 in revenue, and yet spent $11.8 million on advertising. At the time, few would have guessed that all those advertising dollars would lead to the company being famous for its failure! Eventually the amount of cash that these newly public companies were requiring to operate grew to unsustainable levels and, when funding dried up, so did many companies.

Similarly, while many of the factors that led major financial institutions to become financially insolvent during the Great Recession of 2008/2009 were the result of exposure to complex and difficult to decipher derivatives (which largely went unnoticed), there were other important signs of general excess that were more apparent. In the early 2000s, interest rates were low and, as a result, home refinancing activity began to pick up. By 2004, home prices were appreciating at a double-digit pace in many major metropolitan markets, and homeowners began to tap their growing home equity with cash-out refinancing. By 2006, according to Freddie Mac, about 85% of all homeowners who refinanced pulled cash out of their home in the process. Additionally, the number of delinquent mortgages began to grow, with many past due or already in foreclosure within one year of being originated. Clearly these were troubling signs, and while many could not fathom the sheer amount of highly-leveraged risk-taking going on behind the scenes – and the potential damage it would ultimately cause – it was partly a “be careful what you wish for” phenomenon.

Today, we don’t see such obvious excesses in valuations, or slowing fundamentals, or extreme risk-taking behavior. Instead, we see a cycle that has simply exceeded the general expectations of most strategists, and as a result, by some indications, we could be experiencing a peak in economic activity. Moreover, there are increasing uncertainties around global trade, although much of the day-to-day noise is just that so far. We also know that economic stimulus coming from the new tax regime is likely to subdue, if not reverse, next year; although potential infrastructure spending legislation could offset that reality. As such, we still maintain a modest overweight to growth-oriented assets, and we are comfortable with this positioning since the overall environment continues to be highly accommodative. As the year, and economic cycle, wears on, though, we plan to opportunistically reduce this exposure as we recognize that history is likely to repeat itself in some sort of way; and we’d rather accept and be grateful for the good fortune we’ve already accrued, rather than tightly hang on for the last possible gold coin to drop.

Of course, any number of different scenarios could ultimately influence how this current economic cycle plays out, including some where something beyond financial excess causes damage. Nevertheless, we feel it’s increasingly important to monitor things carefully given the vast and varied amount of stimulus still being applied over the course of the next year or so. As King Midas learned the hard way, having a golden touch can easily become a curse.