The art of business cycle analysis
by: Yoonjai Shin, CFA – Vice President & Portfolio Manager, Multi-Asset Management
Since the Great Depression, cyclical fluctuations of income and wealth have become progressively more manageable for those in the developed world. Recessions have become shorter and the amplitude of cycles has generally trended lower. Some explanations for the smoother modern-day cycles include: an increasingly diverse global economy with a shift from goods-producing sectors toward a diverse array of service-oriented sectors, enhanced supply chain management through improved technology, and an increasingly active approach to monetary and fiscal policy to manage inflation and counteract recessions. For investors, this does not mean that volatility has gone away. Business cycles continue to play a significant role in influencing corporate earnings, credit conditions and investor sentiment, all of which contribute to market volatility. It is worthwhile to examine how business cycle analysis can help investors.
The business cycle is a simple concept. Over time, it captures the path of gross domestic product from one trough to the next, including a peak in between. Business cycles are easy to measure in hindsight, but often too complex to understand for sustained financial gain.