Business cycle update: Global activity peaked

Global monetary policy tightening may result in higher volatility in the markets.

  • By Dirk Hofschire, CFA, SVP; Lisa Emsbo-Mattingly, Director; Joshua Lund-Wilde, Research Analyst; and Jacob Weinstein, CFA, Senior Analyst, Asset Allocation Research
  • Business Cycle Update
  • Market Analysis
  • Bonds
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  • Business Cycle Update
  • Market Analysis
  • Bonds
  • Stocks
  • Business Cycle Update
  • Market Analysis
  • Bonds
  • Stocks
  • Business Cycle Update
  • Market Analysis
  • Bonds
  • Stocks
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United States

  • Broad-based US growth implies a low probability of recession, and the US remains in a prolonged shift between the mid- and late-cycle phases of expansion.
  • The trends for profit growth and credit have yet to show the signs of significant deterioration that typically occur during the late-cycle phase.
  • However, the tightening US labor market is supporting wage pressures, which act as a restraint on profit margins and have prompted the Federal Reserve to continue to tighten monetary policy.

Global

  • The global expansion is becoming less synchronized, with the pace of overall activity likely past its peak.
  • China's economy remains in an expansionary phase, but the industrial sector has slowed materially and the risks of a growth recession continue to rise. Policymakers may have begun to ease monetary conditions, but overall activity is in a decelerating trend.
  • Countries most impacted by slowing China industrial activity—including Germany, Japan, and South Korea—have experienced deceleration in recent months.
  • Overall, the global expansion continues, but maturing cycles among many larger economies imply that the risks of a growth slowdown may be higher than generally appreciated.

Asset allocation outlook

  • We believe the world is in the midst of a slow transition toward a less accommodative monetary policy stance, global activity has peaked, the US business cycle continues to mature, asset valuations are not generally attractive, and policy and geopolitical risks are elevated.
  • The shift toward global monetary policy tightening is beginning to slow liquidity growth and result in higher volatility in the financial markets.
  • Therefore, smaller cyclical tilts are warranted at this point in the cycle, in addition to thorough portfolio diversification that includes international equities and inflation-resistant assets.

Business cycle framework

The business cycle, which is the pattern of cyclical fluctuations in an economy over a few years, can influence asset returns over an intermediate-term horizon. Cyclical allocation tilts are only one investment tool, and any adjustments should be considered within the context of long-term portfolio construction principles and strategic asset allocation positioning.

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