One of the strangest things about this economic cycle is that it has started to feel very old very early on in the recovery. Inputs and materials are in short supply; the labor market is seemingly very tight and wages are rising; inflationary pressures are high; and as is historically the case during the latter part of economic cycles, the larger-cap stocks have been strongly outperforming the smaller caps over the last five months.
In this Economics Weekly, we argue that it is too soon to declare that we are now late in the cycle. Most of the late-cycle symptoms we are seeing are related to the synchronized global resurgence in demand, when economies have not yet fully reopened and we are not yet virus free. However, as these supply constraints for both materials and labor gradually ease, demand remains robust, and confidence returns, the environment should be ripe for the now undervalued smaller-cap stocks to once again outperform the larger caps.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.