Economic Cycles
Economic Cycles
A Balanced View
Investing requires adopting a perspective that focuses on both top-down analysis combined with bottom-up assessment of individual positions held in portfolios. We believe it's important to have this dual approach.
Often investors focus too much on a particular asset, and not enough on the macro conditions that might impact portfolios. In particular, one macro condition to carefully watch is where we are in the economic cycle.
Four Stages
The four phases of an economic cycle, or business cycle, are expansion, peak, contraction, and trough.
During expansion, the economy grows with rising GDP, employment, and consumer spending. The peak is the highest point before growth slows and the economy begins to decline. Contraction is a period of economic shrinkage, falling GDP, and rising unemployment. Finally, the trough is the lowest point of the cycle, where the economy hits bottom before beginning to recover.
To be sure, we are in unprecedented territory regarding the economy. Never before have we seen this level of deficit spending, expansion of U.S. debt, as well as changes in fundamental policies (such as tariffs). It's difficult therefore to determine where we are in the economic cycle.
Our Outlook
Our view in our cloudy crystal ball is that we are currently moving away from peak expansion and more towards a slowing economy. We still believe the environment is reasonable for equities with falling tax rates, moderate inflation, and deficit spending. But it is difficult to ignore the signs that we may see a slowdown in economic growth.
We've adjusted portfolio strategies as we factor in potential economic challenges. We will continue to make adjustments as conditions merit.
