Business Cycle – Now & Then
Are business cycles longer now then they use to be and what impact does that have on my portfolio? Business cycles today are not the same as you may have seen in the 70’s and 80’s. The typical standard of business cycles during the 70’s and 80’s was around 5-7 years long. They were also tighter and more volatile. The answer to what’s changed is the cost structure.
The first difference is that you did not have as much of a large global supply chain. It was a lot more difficult to control cost and where you got raw materials and supplies from. Businesses had to guess a lot more than they do now. The second factor is there was more of a unionized environment in the 70’s and 80’s. The environment we are in now is much more “right to work non-union”. This has kept cost lower and more predictable. Companies are able to plan better for inventory.
Business cycles used to be tighter and more volatile. It was more difficult for businesses to plan. Now, business cycles are expanded out and can run longer, up to 10 years. Businesses can adjust and keep the risk amplitude lower mainly in these two previously discussed cost factors. This is one of the primary reasons you tend to see longer business cycles now which could be more beneficial for your portfolio.
The Financial Cycle
The other cycle we want to further educate you on is the financial cycle. Opposed to the business cycle, this is driven by things such as level of consumer debt, housing debt and student debt. If you go back to 2008, that was more of a falloff of a financial cycle rather than a business cycle. In fact, the business cycle was fairly healthy around that time. The financial cycle is one that you would have to watch over an extended period because there are a lot more factors such as corporate and business situations that can cause a problem. Business cycles are a lot longer and less volatile then they use to be while financial cycles are more volatile.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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