As Published in the Shore 2014 Edition of NJ Lifestyle
UNDERSTANDING AND EVALUATING THE BUSINESS CYCLE CAN OFFER valuable information in formulating expectations for the economy and your optimal portfolio allocation. The business cycle is defined as fluctuations in GDP (Gross Domestic Product) in relation to long-term GDP trend growth. The typical cycle usually lasts 9-11 years and can be broken down into five phases, starting with an initial recovery and ending with a recession.
The initial recovery is the phase of the business cycle where the economy starts to pick up from its previous slowdown or recession. Often times this phase is accompanied by easy monetary policy in the form of low interest rates and/or a budget deficit. Business confidence starts to pick up as can be seen with higher inventory purchases, while consumer confidence may remain low as the unemployment rate is high. Inflation during the initial recovery continues to fall, putting downward pressure on government bond yields and the gap between long-term GDP trend growth and actual GDP remains large. As fears of a longer recession subside, the stock market may rise substantially with investors attracted to the riskier assets of small caps, emerging markets, and high yield bonds.