US economic cycle to be shorter in duration; Wall Street investors may need to switch stock strategy (2024)
The US economy is now in an expansion cycle but this period of economic growth is likely to be shorter than the previous three witnessed by the country.
The US economy is now in an expansion cycle but this period of economic growth is likely to be shorter than the previous three witnessed by the country, Morgan Stanley analysts said in a note. This shorter cycle warrants investors to position their strategies accordingly but equities are not expected to run out of favour. “A rapid economic recovery and an emergence of inflation after a 30-year absence mean this cycle could be shorter than the prior three, in our view. We think risk-asset leadership is already shifting from ‘early cycle’ to ‘mid-cycle,’ and that investors should position accordingly,” the note added.
Shorter economic cycle
In the current cycle, economists at the global investment bank see the real GDP returning to its pre-covid growth path in the third quarter of 2021. The fast speed of recovery is expected to result in shortening the runway for this cycle when compared with the last three US expansions that lasted for 127, 72, and 119 months, respectively. Morgan Stanley analysts predict that the current economic cycle will last just 42 months.
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“We’re in a new cycle, and we think from a top-down, high-level perspective, the reflation playbook of continued overweights in equities and credit against underweights in government bonds and cash still makes sense,” the note said. However, the shorter duration of the cycle means a faster shift from ‘early cycle’ to ‘midcycle’ to ‘late-cycle’. They further added that currently, Wall Street is in the ‘repair’ (early-cycle) phase, but given the speed of rebound, the next phase ‘recovery’ (midcycle) could be reached around the fourth quarter of this year. “Given that equities often tend to discount macro regime shifts months in advance, we believe it is time to start thinking about a rotation from ‘repair’ leadership to ‘recovery’ leadership,” Morgan Stanley said.
How to trade
To play the ‘recovery’ trade, analysts recommend adding to ‘recovery’ outperformers with relatively attractive fundamentals — earnings upside at relatively reasonable valuation levels. Autos, Retailing, Consumer Durables, and Cap Goods look most attractive to Morgan Stanley analysts.
Investors have also been advised to add ‘recovery’ outperformers (versus the Russell 3000) with below-benchmark price/2022 EPS ratios and above-benchmark long-term consensus EPS growth. Some of the largest companies, by market capitalization, recommended by Morgan Stanley here include; Deere & Company, Qualcomm Inc, Bed Bath & Beyond, Lowe’s Companies, Micron Technology, Applied Materials, Lam Research Corporation, and Fiserv among others.
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Every market cycle includes four stages: accumulation, markup, distribution, and markdown. If you've ever heard people use terms like “bubble burst”, “crash”, or even “recovery”, what they're referring to are various stages of the market cycle.
What Is the Short Run? The short run is a concept that states that, within a certain period in the future, at least one input is fixed while others are variable. In economics, it expresses the idea that an economy behaves differently depending on the length of time it has to react to certain stimuli.
Every nation's economy fluctuates between periods of expansion and contraction. These changes are caused by levels of employment, productivity, and the total demand for and supply of the nation's goods and services.
According to Prof. Schumpeter, a trade cycle can have 4 phases : (1) Expansion or Boom, (2) Recession, (3) Depression or Trough or Contraction, and (4) Recovery.
There are four stages in a product's life cycle—introduction, growth, maturity, and decline. A company often incurs higher marketing costs when introducing a product to the market but experiences higher sales as product adoption grows.
Economic output, employment, and consumer spending drop in a recession. Interest rates are also likely to decline as central banks—such as the U.S. Federal Reserve Bank—cut rates to support the economy.
The short run, long run and very long run are different time periods in economics. Short run – where one factor of production (e.g. capital) is fixed. This is a time period of fewer than four-six months.
This usually results in job losses and an increase in the unemployment rate. While there is no single definition of recession, it is generally agreed that a recession occurs when there is a period of reduced output and a significant increase in the unemployment rate.
These fluctuations cause businesses to adjust their production schedules and investments. They can also have an impact on employment levels, prices of goods and services, interest rates, and exchange rates. The effects are wide-ranging. During periods of expansion, increased investment leads to improved productivity.
The business cycle has indeed shortened in recent years. The advancements in technology have made it possible for businesses to adapt more quickly and efficiently to changes in consumer preferences and market trends. This agility has allowed companies to stay competitive and relevant, even amidst economic uncertainty.
Many major economies, including the U.S., remained in the late-cycle expansion phase and registered hints of stabilization and even reacceleration in some areas. Expectations of monetary easing have contributed to improving global financial conditions, and worldwide manufacturing activity has firmed.
The Great Depression began in August 1929, when the economic expansion of the Roaring Twenties came to an end. A series of financial crises punctuated the contraction.
Learn to identify the four stages of a stock market cycle: accumulation, markup, distribution, and markdown. From the changing seasons to the ebb and flow of the economy, cycles are all around us.
Stage 4 marks the declining phase, where a stock transitions from a period of distribution to a clear downtrend. This period is characterised by a sustained drop in the stock's price, often initiated by a decisive break below key support levels and moving averages, like the 30-period moving average.
What is the 4-year Market Cycle Theory? The 4-Year Market Cycle Theory states that stock markets tend to follow a regular 4-year cycle consisting of a bull market for the first 2 years followed by a bear market for the next 2 years.
The marketing process consists of four elements: strategic marketing analysis, marketing-mix planning, marketing implementation, and marketing control.
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