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.