Late cycle, or the start of a new one?

By Mark Burgess | January 11, 2021 | Last updated on November 29, 2023
3 min read

The unique nature of the Covid-19 recession, with stock markets reaching new highs as many small businesses struggle to survive, has investors wondering where we are in the economic cycle. Is this the late stage of the long bull run that started in 2009, a report from Richardson Wealth asks, or the beginning of a new cycle that started after equities tanked last March?

Investor optimism is high to start the year, with equity, commodity and bond markets all pricing in a strong recovery, the firm’s January investor strategy report said. “The bulls are in such control that even the storming of the U.S. Capitol building barely registered a wobble in the equity markets’ ascent.”

But the “mismatch” between the surge in Covid-19 cases and high equity valuations creates a challenging environment for investors, the report said. Part of that challenge is determining where we are in the economic cycle.

The argument that we’re early in a new cycle points to the 2020 bear market, when global equities dropped 35%, developed economies saw negative growth for the year and unemployment surged before recovering somewhat. The recession impacted services but “didn’t have to burn through any excesses” such as housing in the 2008 financial crisis or tech spending in the 2000 bubble.

Vaccines will further spur the recovery for sectors impacted by physical distancing policies. “It is this scenario that the equity markets appear to be increasingly pricing in,” the report said.

The argument that we’re still late in the cycle that began in 2009 views the pandemic as “an exogenous shock that triggered a technical bear market and recession but did not end the current cycle.”

Central banks weren’t tightening pre-pandemic and there wasn’t widespread speculation or “silly” investor behaviour. That happened last year, the report said — “big time” — with 480 initial public offerings and elevated retail option trading.

The authors also pointed to the effect of monetary policy on asset prices. “If the economic recovery isn’t a sure thing, there could be an air-pocket ahead,” the report said. Or the market may only realize the extent of the economic damage once vaccines are distributed and life returns closer to normal.

In the end, the authors said they aren’t entirely convinced by either case. While they’re concerned about bubbles, which are indications of a late cycle, they acknowledge that the cycle could keep going.

“From our perspective, the strategy is to trade into some of the lagging or less expensive assets or markets,” the report said. “This should help protect on the downside, and if this is the start of a new cycle, this approach should also benefit from the steady global economic recovery back to ‘normal.’”

Those lagging assets include non-U.S. equities, which Richardson Wealth expects will outperform relative to the tech-heavy U.S. market and its already high valuations. More cyclical European equities no longer have the Brexit distraction weighing on performance, the report said, and commodity-heavy markets such as Canada will benefit from the reflation trade. Bank stocks, which are more heavily weighted in emerging market (EM), European and Canadian indexes, could also do well as the yield curve steepens.

“There has been lots of interest in EM, but we continue to believe there is still more room to run,” the report said.

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Mark Burgess

Mark was the managing editor of from 2017 to 2024.