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How Investors Could Position in the Late Cycle of Expansion

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Shaken out of slumber

After a prolonged calm period, a sell-off in equities (SPY) (QQQ) in October and again in November has shaken the markets out of their slumber. As investors are sitting on top of the longest bull market in history by many measures, it is hardly a surprise that late-cycle jitters have taken over the market. To be in a late cycle of economic expansion typically means growth slowing down and margins contracting, accompanied by higher inflation (TIP) and volatility (VIX).

Late-cycle dynamics

According to a Bank of America Merrill Lynch survey in October, a record 85% of fund managers think that the global economy is in the late cycle. This reading was 11 percentage points higher than it was in December 2007, which was just ahead of a global financial crisis that plunged the world into recession. Also confirming investors’ late-cycle conviction was November’s fund manager survey, where the number of respondents saying that value will outperform growth over the next 12 months jumped 19% sequentially to 39%.

Adjust asset allocation

Investors should modify their asset allocation depending on the current market cycle phase. In later stages of the business cycle, investors need to protect their wealth while positioning for a potential downturn. In such scenarios, focusing on quality is the best bet. Among equities, focusing on companies that have grown their earnings consistently and have solid balance sheets is usually a good strategy, as is increasing allocations to cash, fixed income (TLT), and precious metals (GLD) (SLV). Gold acts as a strong hedge against inflation and stock market decline.

For stock recommendations, subscribe to Market Realist Pro and receive our newsletter, The Thirty Percent. In this series, we’ll discuss the major risks and uncertainties facing markets in the fourth quarter and beyond. We’ll also see how major investment banks recommend investors should play this market. In the next part of this series, we’ll start by discussing major concerns over slow economic growth.

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