How This Cycle Ends Is Clearer Than Ever
Jerome Powell, chairman of the US Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, US, on Wednesday, July 31, 2024. Federal Reserve officials, keen to keep this cycle going, are prepared to cut rates as soon as September.
Photographer: Al Drago/BloombergThe way this business cycle likely ends was finally visible in the corporate earnings reports released in the last few days. It’s not about a downturn in growth due to waning consumer demand, though that will contribute. It’s all about megacap tech companies throwing in the towel on capital investment in artificial intelligence. When that happens, not only will it be a big loss for the economy that helps bring the business cycle to a close, it will also be the sign that the bull market in stocks is over.
The way to play this? A rotation into small caps or ‘boring’ sectors is implicitly a belief the Fed will stick the soft landing, and is, therefore, risky. Another one would be just locking in elevated bond yields, not all the way out to 10 or 30 years, but right up to where the yield curve has started sloping upward, at 5 years.