Business Cycle Framework and Current US Position

​United States

• The mid-cycle expansion continues, underpinned by additional economic reopening, strong consumer balance sheets, and favorable credit conditions.
• Although initial signs of the most extreme supply-related pressures are easing, labor-market shortages are creating more persistent inflation pressures and challenges for business activity.
• Consumer spending is supported by rising wage growth, but high inflation has dampened consumer sentiment.
• Financial conditions remain easy, although they have started to tighten alongside market expectations that the Federal Reserve (Fed) will hike rates in March and tighten monetary policy more quickly than during the last cycle.
• The mid-cycle expansion is on a maturing trajectory, with sustained cyclical improvement the most likely scenario.

Global

• The global expansion remains intact, with many major economies in relatively benign mid-cycle phases.
• China remains in a growth recession, but the industrial cycle appears to be bottoming, and monetary and fiscal policies are gradually shifting to a more accommodative stance.
• Rising inventories relative to sales and the lagged impact of China's slowdown suggest global manufacturing activity may decelerate from last year's decade-high activity levels.
• Many countries continue to struggle with COVID-19 challenges and higher inflation, though the worst of these headwinds might be behind us.
• Despite the pattern of staggered and uneven growth, the general reopening trend supports continued global economic expansion.

Asset allocation outlook

• The mid-cycle backdrop is constructive for more economically sensitive asset classes such as stocks that tend to do well as activity improves.
• Financial markets have become increasingly sensitive to and dependent on extraordinary levels of policy support, leaving them potentially vulnerable to less accommodative global central bank policies.
• Buoyant asset valuations reflect positive expectations built into asset prices.
• The apparent pivot to a more hawkish tightening stance by the Fed and other major central banks may strain liquidity during 2022, raising the odds of higher market volatility.