“The Business Cycle is Overstretched.”

“The U.S. Has Slipped Into the Late Stages of the Business Cycle.”

Headlines such as those have been recurring for going on two years. Good forecasting or Chicken Little-ism?

“The business cycle, also known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence.” – Wikipedia

The current phase is called the Expansion Phase. It’s where GDP, the markets and the economy in general are growing. A quick scan of our DSWP calendar shows that the current ‘cycle’ is now on its 3,691st day. It surpassed the old longevity record on July 1st. It has lasted longer than the Beatles were together as a band and longer than Seinfeld’s run as a sitcom. Chaucer famously said “All good things must come to an end.” So, it’s gotta be finished soon, right? Well, maybe. But why?

One of the problems with the cycles theory is that one can only detect the final stage (Recession) after it has already begun. So, predictions are made about ‘impending’ recessions. Gurus point to various things from inverted yield curves to the ‘irrational exuberance’ of investors. Generally, though, the thought is that markets overheat, bubbles of some kind get created and it all comes crashing down. On the other hand (yes, our two-handed economist is always in attendance) absent overheating and the existence of bubbles what precisely is there to come crashing down? And if the economy and the markets are doing well should we really expect them to success themselves into a coma?

Those with a keen sense of the obvious might ask “How can you call it a cycle if it has not ‘cycled’? And if it hasn’t yet, why would it?

One very important thing to take notice of is; how does the output of this cycle compare to that of prior cycles? Despite being the longest on record, the current business cycle has the indignity of being the weakest cycle in the post-World War II period. The key thing is the highly useful balance of modest growth paired with modest inflation.

That’s a good situation indeed and one that should keep the Fed from over-interfering.

Ron’s Market Minute – Fool’s Errand? 

If I’ve learned anything in my 30-plus years as a professional investor, it is that trying to guess what is going to happen next in the world of Mr. Market with any amount of accuracy or consistency, is a fool’s errand.  At the same time, however, I’ve also learned that being prepared for possible outcomes within a particular timeframe makes it easier for us to make portfolio changes with confidence. 

When the June Fed meeting concluded (with almost unanimous agreement) that no rate cuts were necessary, there were bound to be some knock-on effects. At the current moment the market is pricing in an 80% chance of at least a 0.25% rate cut by the end of July. 

And the question that pops up becomes ‘what generally has happened to market returns after a Fed rate cut?  After a bit of searching (what did we do before the advent of search engines?) we found some data on the historic returns after a ‘first’ Fed rate cut.  A ‘first’ rate cut by definition is a cut after no recent changes, or increases in the Fed rates. This data comes from our friends at Ned Davis Research plus data from S&P Dow Jones Indexes*. 

The chart below is separated into market environments when a recession followed the rate cut vs market environments when no recession followed the rate cut. The data shows a composite past return average in BLUE of what happened when there was a recession, and a past return average in RED of the average returns when no recession followed the cut. Have a look at the graph that compares average returns. I will add here that past returns are no guarantee of anything particular happening in future markets, but still this data does make for an interesting comparison.  Here’s the graph.  Please carefully notice the market returns on average have been up over the twelve months following a Fed rate cut. Check the blue line first.

Now please note also that in the years in which the Fed rate cut was NOT followed by a recession, the returns were rather strikingly different, and actually quite strong as shown by the RED line. I am a firm believer that we are nowhere near the next recession (too much of the data refutes the likelihood of a ‘soon’ upcoming recession), and I believe that the RED case is the more likely one for this time in history. Yes, the chart shows an average return in the twelve months after the FED cut of 24%. Will we see this type of return over the next year?  I don’t know, but the history suggests that we should be prepared for this possibility. It’s something to think about.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw[@]denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

The Update provides information of a general nature regarding legislative or other developments. None of the information contained herein is intended as legal advice or opinions relative to specific matters, facts, situations or issues. Additional facts, information or future developments may affect the subjects addressed in this document. You should consult with an attorney, accountant or DSWP planner about your particular circumstances before acting on any of this information because it may not be applicable to your situation.

Lincoln Financial Securities and Denk Strategic Wealth Partners and their representatives do not offer tax advice. Please see your tax professional regarding your individual needs.

*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.