Business Cycle Update: US Economy in Mid Cycle
Business Cycle Update: US Economy in Mid Cycle
Although the US is in mid cycle, the Delta variant remains a risk to the rest of the world.
BY DIRK HOFSCHIRE, CFA, SVP; JACOB WEINSTEIN, CFA, RESEARCH ANALYST, ASSET ALLOCATION RESEARCH; LISA EMSBO-MATTINGLY, DIRECTOR; AND CAIT DOURNEY, ANALYST, 08/18/2021
Key takeaways
- In the US, growth rates are high but may be peaking as fiscal support and reopening momentum will likely decelerate.
- All major global economies are in expansion, with developed markets tending to have more favorable near-term backdrops.
- Portfolio diversification remains as important as ever, with the valuations of non-US and value equities and inflation-resistant assets appearing relatively favorable.
United States
- The US is in the mid-cycle phase, as a broadening expansion occurred alongside progress on vaccinations and fuller economic reopening.
- Growth rates are high but may be peaking, as fiscal support and reopening momentum will likely decelerate from their extremely supportive trends.
- The supply response—from sluggish worker reentry to stressed supply chains—is struggling to catch up to rising demand, raising inflationary pressures.
- Nominal growth is likely to remain high, but the mix of real activity and inflation is increasingly uncertain, particularly amid the upswing in new COVID-19 variant cases.
- Overall, pent-up consumer demand, supportive fiscal and monetary policy, and favorable credit conditions provide a near-term backdrop for sustained cyclical improvement.
Global
- All major economies are in expansion, but the global recovery continues to become less synchronized due to different rates of vaccination and amounts of policy stimulus.
- Developed markets tend to have more favorable near-term backdrops, with reopening progress in Europe coinciding with improving consumer and services sentiment.
- China's deceleration continues, though we expect growth to stabilize toward year-end.
- Many developing economies continue to struggle with low vaccination rates and more meager resources to confront the COVID-19 Delta variant, leading to slower and more uneven progress in countries such as Brazil and India.
- Despite the pattern of staggered and uncertain headway against the virus, the general trend of fewer restrictions on activity likely implies a continued broadening of the global economic expansion over the course of the next year.
Asset allocation outlook
- The improving cyclical backdrop is constructive for more economically sensitive asset classes, such as stocks, that tend to do well as activity improves.
- Financial markets have become increasingly sensitive to and dependent on extraordinary levels of policy support. Going forward, policymakers support of such measures may wane due to rising inflation expectations.
- Buoyant asset valuations reflect positive expectations built into asset prices and create the potential for outsized bouts of volatility.
- Portfolio diversification remains as important as ever, with the valuations of non-US and value equities and inflation-resistant assets appearing relatively favorable.
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.
The diagram above is a hypothetical illustration of the business cycle, the pattern of cyclical fluctuations in an economy over a few years that can influence asset returns over an intermediate-term horizon. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. Source: Fidelity Investments (Asset Allocation Research Team or AART), as of 07/31/2021. Advisory services offered through CS Planning Corp, a SEC registered investment advisor.