Whether or not the current economic cycle is a new one–as opposed to a continuation of the pre-Covid cycle–isn’t just a question for the wonks.
As the pandemic brought the global economy to a sudden stop and extraordinary fiscal and monetary responses drove a rapid recovery, some argue that both were so fast that conditions never reset in the way they usually do during recessions, says Morgan Stanley’s chief cross-asset strategist Andrew Sheets.
But looking back over the last three U.S. recessions, Sheets says there are several key similarities from April 2020 to those past periods when what he calls normal early-cycle investment strategies have worked well. All three were similarly preceded by high consumer confidence, low unemployment, and declining equity market breadth. He notes that corporate default rates since April have been similar to other recessions when measured on a rolling two-year basis.
“If it walks like a new cycle and talks like a new cycle, we think that investors should treat it like a new cycle,” says Sheets.
There’s a practical reason why investors might make the distinction.
Assuming we are in fact in a new economic cycle, it’s crucial to consider how this one is different from those that have come before–even if there are plenty of similarities. “While this cycle has so far followed many ‘normal’ patterns, its evolution could be unique,” Sheets says, suggesting this cycle could burn unusually hot and require earlier-than-usual repositioning by investors.
