Chart of the Day: February 3, 2023
Where are we in the cycle?
My investment process begins with a top down analysis to determine where both the market and the economy is at in the standard 4-6 year cycle. If you know the current state of the cycle, you can position a portfolio to take advantage of the next cycle phase.
The chart in Figure 1 shows my most recent attempt at cycle identification.
My conclusion is the market’s in the early stages of its cycle and the economy is in the late stages, nearing a cycle bottom.1 This process could be extended if the economy dips into a recession — the probability of that outcome is falling, in my opinion.
This cycle identification process uses both relative strength market data, comparing each sector’s performance vs the overall market, and various economic data — such as consumer expectations, industrial production, interest rates, and the yield curve.
If my analysis is correct, the best performing sectors over the intermediate term should be those that typically do well in the early recovery phase of the economic cycle — technology, consumer discretionary, communication services, and industrials. I would also throw real estate and financials in the mix — they should do well if the yield curve normalizes — this is yet to be seen.
Caveat: This could all change if the Fed loses control, overtightens, and the economy rolls into a significant deflationary recession. This is a non-zero probability outcome.
— Brant
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Not all economic cycles result in full recessions with high unemployment and negative real GDP growth. Some cycles only experiences a slow down in real GDP growth and a slowdown in corporate EPS growth. Both 1994 and 2015 are perfect examples.