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Morning Notes — Hitting for the Cycle

Hitting for the Cycle

January 10, 2020

Most investors are underestimating the durability of the economic cycle, which is probably influenced by last summer’s brief yield curve inversion and the duration of the recovery. We all know that economic cycles don’t just die of old age. Most of the time, they die because of restrictive fiscal or monetary conditions. That’s not the case today. Occasionally, expansionary cycles will end after a shock triggers a credit event. But by most measures, credit conditions remain benign, especially at the household level. As we’ve been noting for several weeks, we expect global growth to run above trend sometime around the middle of the year. But we expect improving flash manufacturing PMI data later this quarter will be enough to convince investors of its inevitability. If we’re right, investors will look to add the most cyclically-sensitive assets that have yet to fully participate. We think asset classes like Japan, Emerging Markets and Eurozone equities have a good chance of outperforming US markets over the next 6-9 months. And in the US, we expect Energy and Industrials will widely outperform defensive groups (Consumer Staples) and bond proxies (Utilities and REITs).

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