Understanding
the business cycle
may reveal new opportunities
  • biz_01_cover_2018

    Learn about the
    business cycle
    and where we
    are now, so you
    can make more
    informed choices
    about your
    investments.

  • biz_02_cycle_2018

     

    The business cycle is a natural evolution that we see in every economy.

    biz_02_icon_increases_16px_1 Business activity increases as companies produce new products and services that consumers want


    biz_02_icon_decreases_16px_1 Business activity decreases as the markets for these innovations mature and consumer spending slows


  • All investors should consider learning more about the business cycle because it may help identify investment opportunities.



    biz_03_brief_case-2


    The business cycle is a primary factor that drives
    business performance


    Performance generally drives
    investment values and returns
    biz_03_magnify_2


    Investors face risks as the business cycle
    transitions from one stage to the next


    Those transitions also create
    opportunities for informed investors
  • biz_04_cycle_2018

     

    During a full rotation, we see the business cycle transition through expansion and recession.

    • Expansion has three stages: recovery, mid-expansion and late expansion
    • Each stage has characteristics that help us identify it
  • biz_05_recovery_2018

     

    When recovery begins economic growth accelerates.

    • Employment growth begins again
    • Inflation returns to a moderate level
    • Interest rates remain steady
    • The yield curve remains normally sloped





    The yield curve shows interest rates for U.S. Treasury debt at issued durations — currently from four weeks to 30 years.

  • biz_06_mid-expansion_2018

     

    In mid-expansion, economic growth is typically moderate.

    • Employment growth is steady
    • Inflation starts to increase
    • Interest rates begin to rise
    • The yield curve flattens
  • biz_07_late_expansion_2018

     

    As we reach late expansion, economic growth slows down.

    • Employment growth slows
    • Inflation reaches a peak
    • Interest rate increases stop
    • The yield curve inverts
  • biz_08_recession_2018

     

    During a recession, economic growth is negative.

    • Employment declines
    • Disinflation or deflation takes over
    • Interest rates decrease
    • The yield curve returns to a normal positive slope





    Disinflation is a slower rate of inflation, and deflation is when price levels actually decrease.

  • Certain asset classes typically perform better than others during the different stages of the business cycle.


    Recovery -- Historically outperformed: Small-cap stocks, Emerging market stocks, Commodities; Historically underperformed: Large-cap stocks, International stocks, International bonds; Mid-expansion -- Historically outperformed: Large-cap stocks, Mid-cap stocks, Intermediate U.S. bonds; Historically underperformed: Emerging market stocks, International bonds, Commodities
    biz_09_investments_2_2018

  •  

    As of 2018, indicators suggest we’re now in late expansion.

    • Employment has been growing and unemployment remains low
    • Inflation has been very low, but is now starting to rise
    • Economic growth has been steady since the end of the last recession
    • The Federal Reserve has been raising the fed funds rate since December 2015; gradual hikes are expected in 2018
    • Although the curve has flattened considerably in the past year, it still has some distance to go before it inverts

    As of January 2018 Source: Nationwide Economics

  • Two investment opportunities may deserve closer consideration in this late expansion stage of the current business cycle.


    biz_11_globe-2
    International stocks

    may have the potential to outperform U.S. stocks in the
    coming years as expansion continues


    biz_11_pie_chart-2
    Small-cap stocks

    are expected to record stronger profits than large-cap stocks*


    Remember that any choices you make should be consistent with your long-term investment goals.

    *Source: Factset, 2017.

  • Work with a financial advisor to maintain a disciplined investment strategy throughout all stages of the business cycle.




    MFM-2482AO.1

Printable version

View and download a printable version of this guide.

The yield curve

Also review our concise guide about the yield curve.

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