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Business Cycle Update
Third Quarter 2022
Global Business Cycle Continues to Mature
Most major economies experienced maturing trends in their business cycles due to high commodity prices, general inflation pressures, and tightening monetary and financial conditions. The U.S. is in the late-cycle expansion phase with moderate recession risk, while Europe faces rising near-term recession risks. China shows incipient signs of emerging from its growth recession amid increased policy stimulus.
- Activity rebounds (GDP, IP, employment, incomes)
- Credit begins to grow
- Profits grow rapidly
- Policy still stimulative
- Inventories low; sales improve
- Growth peaking
- Credit growth strong
- Profit growth peaks
- Policy neutral
- Inventories, sales grow, equilibrium reached
- Growth moderating
- Credit tightens
- Earnings under pressure
- Policy contradictory
- Inventories grow; sales growth falls
- Falling activity
- Credit drives up
- Profits decline
- Policy eases
- Inventories; sales fall
- Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
- Generally, among asset classes, stocks are more volatile than bonds.or short-term instruments and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Although the bond market is also volatile, lower-quality debt securities, including leveraged loans, generally offer higher yields compared to investment-grade securities, but also involve greater risk of default or price changes. Foreign markets can be more volatile than U.S. markets due to increased risks of adverse issuer, political, market, or economic developments, all of which are magnified in emerging markets.
- Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk.
- In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longerterm securities.)
- Fixed-income securities carry inflation, credit, and default risks for both issuers and counterparties.
- Investing involves risk, including risk of loss.
- Past performance is no guarantee of future results.
- Diversification and asset allocation do not ensure a profit or guarantee against loss.
- All indices are unmanaged. You cannot invest directly in an index.
- The Business Cycle Framework depicts the general pattern of economic cycles throughout history, though each cycle is different; specific commentary on the current stage is provided in the mai body of the text. In general, the typical business cycle demonstrates the following:
- During the typical early-cycle phase, the economy bottoms out and picks up steam until it exits recession then begins the recovery as activity accelerates. Inflationary pressures are typically low, monetary policy is accommodative, and the yield curve is steep. Economically sensitive asset classes such as stocks tend to experience their best performance of the cycle.
- During the typical mid-cycle phase, the economy exits recovery and enters into expansion, characterized by broader and more self-sustaining economic momentum but a more moderate pace of growth. Inflationary pressures typically begin to rise, monetary policy becomes tighter, and the yield curve experiences some flattening. Economically sensitive asset classes tend to continue benefiting from a growing economy, but their relative advantage narrows.
- During the typical late-cycle phase, the economic expansion matures, inflationary pressures continue to rise, and the yield curve may eventually become flat or inverted. Eventually, the economy contracts and enters recession, with monetary policy shifting from tightening to easing. Less economically sensitive asset categories tend to hold up better, particularly right before and upon entering recession.
- Please note that there is no uniformity of time among phases, nor is there always a chronological progression in this order. For example, business cycles have varied between one and 10 years in the U.S., and there have been examples when the economy has skipped a phase or retraced an earlier one.