Investing In Foreign Markets Sounds Exciting - But Isn't Always, Redux

Summary

Global business cycles are closely interconnected and synchronized.

Global equity markets reflect the policies of their leaders.

Global equity markets respond accordingly.

My article published on November 20, 2020 Investing In Foreign Markets Sounds Exciting - But Isn't Always reviewed the performance of the main global economic areas and the performance of their equity markets,

The conclusion was the global business cycles are perfectly synchronized and so are their major tops and bottoms of their equity markets. This article is updating the above article and looks at the most recent relative economic performance of their business cycles and markets.

Source: The Peter Dag Portfolio Strategy and Management

The main force driving the US business cycle is the need to keep inventories growing at the same pace as sales as discussed in detail here.

During Phase 1 & 2 of the business cycle (see above graph), business increases production, hires more workers, buys more raw materials, and increases borrowing to meet its operational needs. The virtuous cycle (positive feedback) lasts until the end of Phase 2.

At the end of Phase 2, soaring commodity prices such as crude oil, lumber, copper, and rising wages, and interest rates create an inflationary environment causing consumers to become more cautious about their spending. 

The slowdown of demand causes a negative cycle (negative feedback). Business is forced to reduce the growth of inventories by cutting raw material purchases, laying off workers, and reducing borrowing. The business cycle is now in Phase 3.

The business cycle goes through Phases 3 & 4 until the causes that induced the slowdown are brought under control. At that time consumers will recognize their purchasing power has increased again due to the decline in commodities, inflation, interest rates, and inflation. Demand increases and the virtuous cycle starts all over again with Phase 1.

                    Source: OECD

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