Using Economic Cycles to Assess 2018 Global Market Risks

Summary

This report uses a cycle model to assess global markets in 2018. It identifies recurring short, medium, and long cycles in year-over-year financial and economic indicators, and says regression analysis supports their role in asset-price movements. The authors compare filtered industrial-output measures with equally weighted asset indexes to infer how economic conditions relate to asset classes.

Based on that framework, the report expects long-cycle recovery alongside weakening short cycles in equities and commodities. It anticipates a possible second-quarter global equity peak, with US stocks a key risk; it also favors value investing and suggests dollar and bond exposure could offer a defensive opportunity as risk assets weaken. For Chinese equities, it expects a broad advance in the first half. These are forecasts made in 2018, not current guidance. The authors caution that policy shocks and short-term volatility can disrupt historical cycle patterns, and that the inferred cycle lengths may not hold in future markets.

Key ideas

• The model identifies recurring 42-month, 100-month, and 200-month cycles in many year-over-year indicators.
• The report links longer cycles to strength in assets more closely tied to the real economy and weakness in rate-sensitive assets.
• It forecasts a possible global equity peak in the second quarter of 2018, with US equities presenting particular risk.
• It expects value investing to remain influential and suggests dollar and bond exposure as a potential defensive allocation.
• The authors warn that policy shocks and market volatility can make historical cycle patterns fail.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.