While the business cycle is “less useful” in the current market recovery than it has been in the past, Natixis chief market strategist David Lafferty says it is still a useful means of analysing capital markets.
“While we don’t believe the business cycle has been ‘repealed’, the nature of this recovery indicates that it has at least changed somewhat,” he said.
“It is often pointed out that the post-GFC recovery has been the most anaemic in history, averaging just 2.1 per cent annually since the third quarter of 2009, while typical U.S. recovery/expansions average 35 per cent.”
Using this measure to assess current economic conditions, Mr Lafferty said markets are currently in the later stages of the business cycle, pointing to flattening yield curves, high levels of credit creation and stretched asset valuations as evidence of this.
These factors do not always indicate a recession however, and Mr Lafferty added that “perhaps the old rules of thumb don’t apply” given how long and weak the current cycle has been.
Mr Lafferty said the Composite Index of Leading Indicators (LEI), which measures a range of economic indicators including average weekly hours worked, the amount of manufacturers’ new orders for consumer goods and the S&P 500 index, doesn’t show signs of an imminent recession.
“The LEI has rolled over in 2016. The month-on-month change has dipped into negative territory twice, but remains above 0 per cent on a year-on-year basis. Since 1960, there has been only one instance when the year-on-year LEI has fallen below zero without the U.S. immediately entering recession.
“There have, however, been several near misses, where the LEI plunged but didn’t go negative, and no recession materialised; 1996, 1999, 2003, 2013 - this is analogous to where we are today,” he said.
There are few signs of an immediate recession, Mr Lafferty said, but a shock US election outcome, a sustained increase in jobless claims, or a more aggressive Federal Reserve could affect this.
“The foundation of our asset class views is that a near-term recession is not likely – less 50 per cent chance - but still very possible – more than 25 per cent,” he said.
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