How do assets perform in a maturing business cycle?

Highlights:

• Following an unusually prolonged economic upswing, we may be approaching a late stage of the US cycle, characterized by slower growth and shrinking profit margins.
• While we are not there yet, investors may ask how to best position for a maturing cycle.
• Looking back at late-cycle periods from the early 1980s, we find that US equities tend to outperform long-term sovereign bonds while corporate spreads widen, in both the US and euro area.
• As a complementary analysis, we review the impact of monetary policy and long-term yields on the relative performance of equities vs bonds. Our evidence suggests that, while the best has passed, equities can still outperform.
• In conclusion, while we have moved away from the goldilocks environment, the outlook for equities is still overall benign. But with the cycle maturing, we are moving towards a more challenging zone.

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