The Business Cycle Didn’t Disappear. COVID Just Delayed It.

The Business Cycle Didn’t Disappear. COVID Just Delayed It

For years, investors have been waiting for the next normal economic downturn. Then COVID came along and changed the script.

The economy is cyclical.

Booms eventually create excesses. Excesses lead to slower growth. Slower growth eventually creates a recession. Recessions clear out weak businesses, excess inventories, bad investments and financial leverage. Then the next expansion begins.

It isn’t always pretty—but it’s normal.

What was unusual about the COVID era is that policymakers essentially interrupted that process.

We were already at the end of a historic expansion

Before COVID hit, the U.S. economy had already experienced the longest expansion in American history.

The expansion that began in June 2009 lasted 128 months, finally reaching its peak in February 2020.

There were plenty of reasons to believe the economy was getting late in the cycle.

Interest rates had been extraordinarily low for years. Asset prices had risen substantially. Corporate debt had increased. And the Federal Reserve had already been forced to respond to signs of stress in financial markets in 2019.

Then COVID arrived.

The economy didn’t experience a traditional recession. It experienced something closer to an economic emergency.

The NBER ultimately classified February 2020 through April 2020 as a recession—just two months, making it the shortest U.S. recession on record.

And that’s where the story gets interesting.

The recession that never really got to do its job

Normally, a recession is painful because the economy has to rebalance.

Companies that aren’t productive enough fail. Businesses reduce inventories. Consumers pull back spending. Employers cut payrolls. Credit becomes harder to obtain. Asset prices fall.

Eventually, those excesses are worked off.

COVID was different.

The government and Federal Reserve responded with extraordinary fiscal and monetary support. Stimulus checks, enhanced unemployment benefits, the Paycheck Protection Program, near-zero interest rates and massive asset purchases helped prevent an economic collapse.

That was arguably the right response to an unprecedented crisis.

But there was a consequence:

The normal economic cleansing process was dramatically shortened.

Instead of spending years working through the excesses of the previous cycle, the economy was effectively put on life support and then rapidly restarted.

Think of it like hitting the brakes on a car—and then immediately putting your foot back on the accelerator.

And then came the second-order effects

When the economy reopened, consumers had money.

They also had fewer opportunities to spend it on services because restaurants, travel, entertainment and other activities were still constrained.

So demand shifted heavily toward goods.

At the same time, factories, ports and supply chains were struggling to keep up.

That created a classic economic problem:

Too much demand chasing too little supply.

Federal Reserve research found that fiscal support increased demand for consumption goods while production couldn’t adjust quickly enough, contributing to inflation.

Inflation then forced the Fed to reverse course.

The same central bank that had spent years supporting the economy suddenly had to aggressively tighten financial conditions.

Interest rates went from essentially zero to levels that fundamentally changed the economics of borrowing, housing, business investment and asset valuations.

In other words, the economic cycle eventually came back.

It just came back through a different door.

COVID may have delayed the cycle rather than eliminated it

This is an important distinction for investors.

COVID didn’t repeal the business cycle.

It interrupted it.

The recession was so short that many of the normal consequences of a downturn were never fully experienced. Meanwhile, enormous fiscal and monetary support helped push demand back into the economy before the traditional adjustment process had fully played out.

That may help explain why the post-COVID period has felt so strange.

We went from recession to stimulus to reopening to inflation to aggressive monetary tightening—all in a remarkably short period.

The cycle was compressed.

And when cycles are compressed, the consequences can show up in unexpected places.

What does this mean for investors?

It means we shouldn’t assume that because the economy avoided a traditional recession in 2020, economic cycles have somehow become obsolete.

They haven’t.

Markets still respond to earnings, interest rates, credit conditions, employment and consumer demand.

Businesses still overinvest during good times.

Consumers still borrow when money is cheap.

Investors still chase whatever has been working.

And eventually, economic and financial excesses have to be reconciled.

The lesson isn’t that another massive recession is inevitable.

The lesson is much simpler:

Don’t confuse policy intervention with the elimination of economic risk.

The government can delay a downturn.

The Federal Reserve can cushion a downturn.

Stimulus can accelerate a recovery.

But none of those things permanently eliminate the business cycle.

The financial planning lesson

This matters even more for individuals than it does for economists.

A financial plan shouldn’t assume that the good times will continue indefinitely.

If you’re five years from retirement, a major market downturn can have a dramatically different impact than it does when you’re 25 and earning a paycheck.

That’s why financial planning isn’t simply about maximizing returns.

It’s about building a portfolio and a financial life that can survive the inevitable periods when the economy doesn’t cooperate.

You need liquidity.

You need diversification.

You need to understand how much risk you’re actually taking.

And you need a plan for what happens when the market—or the economy—does something you didn’t expect.

Because the biggest mistake investors can make is believing that the business cycle has disappeared.

**It hasn’t.

COVID didn’t kill the cycle.

It delayed it, distorted it and changed the way we experienced it.**

And eventually, economic gravity always gets a vote.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Colin Symons, CIO Lloyd Financial Group

Q2 GDP was 1.5%, as expected, with Personal Consumption up to 3.4%, from 3.2%.

Personal Spending was 0.2% m/m vs. exp. 0.1%, while Personal Income was 0.4% vs. exp. 0.2%.

Core PCE was 0.2% m/m, as expected, but the unrounded number 0.246%, which is on the higher side of estimates. Headline PCE was 0.2% m/m vs. exp. 0.1%. Leaning higher but nothing huge. We knew this would be noisy, and here we are. Portfolio management fees appear to be a big driver of the somewhat hot print.

Durable Goods Orders were 1.1% m/m vs. exp. 0.4%. Core Orders were 0.4% vs. exp. 0.6%.

All that got the Q3 Atlanta Fed GDPNow from 4.09% to 4.61%, largely on better consumption.

Ambercrombie & Fitch (ANF) was up 36% after notching big tariff refunds and talking about margin improvement and buybacks.

META reached a settlement with state AGs over claims their platforms were deliberately designed to be addictive to minors. They’ll pay almost $18B over ten years.

HP (HPQ) had a nice-looking quarter but is down -10 on weak PC shipments, down -16% Y/Y.

Salesforce (CRM) is up 11% on a strong outlook.

Crowdstrike (CRWD) is up 9% on raised guidance

Nvidia (NVDA) reported huge numbers, with revenue more than doubling Y/Y, and they forecasted strong growth for next quarter and the next year, sending shares up 7%. At least according to NVDA, semis have more room to run.

Jobless Claims and Trade balance today.

Bottom line: NVDA showed there’s room to run in the AI trade.

Click here to schedule a meeting — I’m here to help you take the next step toward financial freedom.

Disclosures/Regulation:

This content is intended to provide general information about Lloyd Financial. It is not intended to offer or deliver investment advice in any way. Information regarding investment services are provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable

Want a clearer view of where you stand? Schedule a free portfolio analysis.