Understanding market cycles
Understanding where we are in the market cycle—and where we're going—can offer important context and perspective for any investor. This page provides a comprehensive exploration of the different phases of market cycles and takes a closer look at some timely strategies to consider adding to your core portfolio.
While markets can be unpredictable over the short term, they do tend to follow established patterns over longer periods of time. By understanding where we are in the current market cycle, you can better align your portfolio with those market forces while preparing for what’s next.
Early cycle: recovery
Economic downturns are never pleasant, but history has shown that they’re temporary. As the recovery stage of the market cycle starts to take hold, fundamentals gradually stop deteriorating and begin to improve, albeit sometimes slowly.
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Sentiment:
Cautious optimism
Investors are starting to believe that the worst is behind them. They may not have much appetite for risk, but they’re increasingly ready to consider changes to their portfolios.
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Interest rates:
Bottoming
Interest rates, which likely saw a number of cuts during the preceding recession, are typically either at or near their cyclical bottom.
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Corporate earnings:
Trough
Corporate earnings, which generally suffered during the recession, have reached their nadir and are beginning to see improving forward estimates.
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Workforce:Peak unemployment
Often the jobs situation has reached an inflection point, and as the economy continues to heal, the unemployment rate begins to fall.
Investment opportunities
How to position your portfolio when market signals indicate a recovery
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Small Cap Core Fund Disciplined Value Fund Disciplined Value Mid Cap Fund Multifactor Mid Cap ETF Mid Cap Growth Fund
Smaller size and value
At this stage, increasing equity risk may warrant consideration.
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Bond Fund
High yield
An improving economy has often served as a tailwind for credit allocations.
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Alternative Asset Allocation Fund
Targeted diversification
Broad-based exposure to other investments beyond stocks and bonds can offer upside potential as markets improve.
Midcycle: expansion
In this stage of the cycle, the economy’s found its footing and is now growing at a healthy clip. Fundamentals and sentiment are both improving.
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Sentiment:
Exuberant
Investors at this stage are embracing risk. Markets have typically been notching steady gains, and the good news seems to consistently outweigh the bad.
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Interest rates:
Rising
The central bank may be tightening monetary policy at this stage in an attempt to prevent the economy from overheating and to keep inflation under control.
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Corporate earnings:
Expanding
Corporate earnings have been benefiting from the expanding economy and improving investor sentiment, using those tailwinds to drive their bottom line profitability.
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Workforce:
Improving
Higher corporate earnings and rising demand for goods and services typically translate to an increased rate of hiring while the labor market continues to tighten.
Investment opportunities
How to position your portfolio when market signals indicate expansion
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Small Cap Core Fund Fundamental Large Cap Core Fund International Growth Fund Disciplined Value Fund Disciplined Value Mid Cap Fund
Quality and value
A more selective approach to equities—with an emphasis on fundamentals—may be appropriate during this stage.
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Bond Fund Investment Grade Bond Fund
Corporate credit
Broad exposure to corporate credit can be beneficial in an environment of contracting spread levels.
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Alternative Asset Allocation Fund
Targeted diversification
Targeting niche asset classes with higher potential beta may be worth considering as markets continue to rally.
Late cycle: slowdown
Cracks are emerging in the economy. After a series of interest-rate hikes, debt has become notably more expensive, reducing liquidity in the capital markets. Volatility across asset classes may be on the rise and markets’ direction is less certain.
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Sentiment:
Increasingly cautious
Headline risk is increasing and volatility may be rising in the markets. Investors are increasingly looking to dial down risk.
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Interest rates:
Peak
Central banks will typically pause their tightening policies in this stage, waiting to see whether the supply of money has been sufficiently tightened before taking additional actions.
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Corporate earnings:
Plateauing
Corporations are beginning to feel the pinch of more conservative consumer behavior and higher interest rates. Capital expenditures may be put on hold as the outlook for the economy darkens.
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Workforce:
Full employment
Unemployment is likely at or near a cyclical low, but corporations may have slowed their rate of hiring or implemented headcount freezes as they brace for a possible economic downturn.
Investment opportunities
How to position your portfolio when market signals indicate a slowdown
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International Growth Fund Emerging Markets Equity Fund Small Cap Core Fund
Quality
With mounting uncertainty in the stock market, consider rotating into offerings that focus on quality in those segments that may be experiencing heightened volatility.
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Bond Fund Investment Grade Bond Fund
Mortgage-backed securities and investment-grade corporates
Pivoting to emphasize the quality fixed-income positions during this phase may prove prudent.
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Alternative Asset Allocation Fund Infrastructure Fund Diversified Macro Fund Asset-Based Lending Fund
Enhanced diversification
Consider increasing exposure to investments that pursue nontraditional approaches and offer low correlations to stocks and bonds.
Market trough: recession
In this stage, the economy is contracting. Investors typically have adopted a risk-off stance amid stock market declines and widening spreads in the bond markets.
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Sentiment:
Deflated
Falling asset prices in many segments of the stock and bond markets have taken the wind out of investors’ sails. Valuations often continue to fall until opportunities begin to appear.
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Interest rates:
Declining
Central banks are often cutting short-term rates at this stage in an attempt to stimulate the economy and induce some appetite for risk.
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Corporate earnings:
Contracting
Corporate earnings are generally falling as demand shrinks throughout the broad economy, both among consumers and other businesses.
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Workforce:
Rising unemployment
With falling demand and reduced earnings, many corporations will either hold off on hiring or make cuts to their workforce. The result is rising unemployment.
Investment opportunities
How to position your portfolio when market signals indicate recession
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International Growth Fund Small Cap Core Fund Disciplined Value Fund
Low volatility
Rather than avoiding stock market exposure, consider pivoting to lower volatility strategies that can help prepare portfolios for the eventual rebound.
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Bond Fund Investment Grade Bond Fund
Government bonds and investment-grade corporates
Consider tilting fixed-income positions away from credit risk toward more rate-sensitive, high-quality segments.
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Alternative Asset Allocation Fund Infrastructure Fund Diversified Macro Fund Asset-Based Lending Fund
Enhanced diversification
With risk assets typically declining, consider increasing positions in areas of the market that are more insulated from any changes in investors’ appetites for risk.
A deeper dive
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