Dissecting the Business Cycle

Dissecting the Business Cycle

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.

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Second Quarter 2014 Market Overview

Second Quarter 2014 Market Overview

With the 2014 calendar year eclipsing the 1/2 way mark, the world financial markets including most asset classes, have oddly rallied in unison higher. This last occurred in 1993. Accordingly, if you maintain a balanced account which we always advocate at CRA, it most likely advanced in its entirety throughout the quarter, albeit a slow grind upward.

World Stock including Developed International and Emerging Market, the entire bond market, REITS, MLPs, and even commodities all have risen in 2014. The “melt up” reflects market resilience amid uneven US growth, and political and economic unrest in the Ukraine and the Middle East. Much of the market’s broad lift is attributable to sustained and continued efforts of the world’s central banks to a commitment of keeping interest rates low to ensure that their own economies continue their painfully slow recoveries, which in some cases began nearly five years ago.
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