Late-cycle economy: What to expect

Volatility may go up as most countries, including the US, are firmly in late-cycle.

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Key takeaways

  • Entering 2020, the global cycle reflected signs of a bottoming in trade and industrial activity, incremental improvement in corporate sentiment in part due to de-escalation of the US-China trade confrontation, and hints of improvement in some countries such as Germany.
  • The US is firmly in the late-cycle phase as evidenced by tight labor markets, challenged corporate profit margins, and a flat yield curve.
  • Overall, we expect the late-cycle environment to provide more volatility and a less favorable risk-return profile for asset markets than during recent years.

United States

  • The US is firmly in the late-cycle phase as evidenced by tight labor markets, challenged corporate profit margins, and a flat yield curve.
  • The US consumer and housing sector remain solid amid cycle-low unemployment and low interest rates.
  • Leading indicators for employment, consumption, and manufacturing have stopped improving—a typical pattern during late-cycle.
  • The inflation outlook remains firm but range bound, allowing the Federal Reserve to remain accommodative.

Global

  • Entering 2020, the global cycle reflected signs of a bottoming in trade and industrial activity, incremental improvement in corporate sentiment in part due to de-escalation of the US-China trade confrontation, and hints of improvement in some countries such as Germany.
  • However, the coronavirus outbreak in China adds a significant near-term headwind to global growth.
  • China is likely to step up its monetary and fiscal policy easing in order to smooth disruptions to its underlying growth trend.
  • Most major economies are in the late-cycle phase, and the near-term global outlook has become less certain.

Asset allocation outlook

  • Consistent with a maturing business cycle, asset-class patterns may become less reliable, warranting smaller cyclical tilts and prioritization of portfolio diversification.
  • The favorable liquidity environment provided by dovish central banks may provide support for financial conditions in the near term, but late-cycle conditions may blunt the ability of monetary easing to stimulate growth.
  • Non-US equities and inflation-sensitive assets are attractive from both a valuation and diversification perspective.
  • Overall, we expect the late-cycle environment to provide more volatility and a less favorable risk-return profile for asset markets than during recent years.

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