CFA L3 learning notes-CME-how business cycles affect short- and long-term expectations

LOS-discuss how business cycles affect short- and long-term expectations

CFA L3 learningnotes-approaches to economic forecasting

Business cycles have an impact on both short- and long-term expectations in the economy and capital markets. I

In the short term, business cycles can significantly influence investor sentiment, market trends, and economic indicators.
Different phases of the cycle, such as initial recovery, early expansion, late expansion, slowdown, and contraction, bring distinct market effects.
During the initial recovery and early expansion phases, stock markets tend to rise, while short-term rates and government bond yields are low.
In the late expansion phase, interest rates rise, and credit spreads widen.
In the slowdown phase, short-term rates may be high and bond yields may decline sharply. During a contraction or recession, short-term interest rates and bond yields drop, and the stock market declines initially but starts to rise before the recovery emerges.

In the long term, business cycles provide a framework for understanding the overall trend of economic growth and setting expectations for investment.
Business cycles help to anchor long-term expectations by providing a trend rate of economic growth. This trend growth rate serves as a reference point for setting long-run investment expectations.
Over the long term, deviations from the trend are expected to wash out, as the economy goes through cycles of expansion and contraction. Therefore, information about the current economic and market environment becomes less valuable over very long horizons.
Long-term expectations are influenced by structural forces, such as technological advancements, demographic changes, and policy shifts. These secular forces shape the long-term trajectory of the economy and financial markets, regardless of short-term fluctuations caused by business cycles.

Business cycles impact short-term expectations through market trends and indicators specific to each phase, while long-term expectations are influenced by the overall trend of economic growth and deviations from the trend. The business cycle analysis provides valuable insights for investment decision-making, particularly over horizons within the likely expansion and contraction phases of the cycle.

30 Jun 2023 - by toptradeready.com