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For many modern investors, particularly the millennial generation, the concept of a full business cycle remains largely theoretical. While the 2020 pandemic caused a sharp economic shock, its artificial nature and the subsequent massive monetary intervention mean it didn't follow the traditional, slow-burning arc of a classic economic cycle. Understanding where we sit in the "macroverse" requires more than just looking at a stock chart; it requires a visualization of how labor, inflation, and interest rates interact to create the peaks and troughs of market history. By analyzing these relationships, we can better identify whether we are approaching a "soft landing" or if the economy is barreling toward a more significant correction.
Key Takeaways
- The Business Cycle Metric: A comprehensive way to visualize the cycle is by calculating the S&P 500 divided by the unemployment rate squared, multiplied by both the inflation rate and interest rates.
- The Risk Curve Rotation: During the late stages of a cycle, liquidity tends to flow from high-risk assets (altcoins) to Bitcoin, then to the S&P 500, and finally into defensive assets like gold and cash.
- Energy as a Lagging Indicator: The energy sector (XLE) is often the last to top out, frequently remaining bullish even after the broader market has begun its descent into a recession.
- Preparation Over Prediction: Rather than timing the exact bottom, investors should focus on being hedged with cash and metals to capitalize on the "hard landing" if and when it occurs.
The Evolution of the Economic Cycle
In the late 19th and early 20th centuries, recessions were a frequent, almost rhythmic occurrence. Looking at data from the 1870s through the early 1900s, economic contractions happened nearly every two to three years. However, as central banking evolved and monetary tools became more aggressive, the duration between these cycles began to stretch. In the modern era, we have seen expansions lasting a decade or more, leading many to believe that the traditional business cycle has been "solved" or permanently delayed.
The Illusion of Stability
Just because a major recession hasn't occurred in recent memory doesn't mean the underlying mechanics of the market have changed. The long periods of growth seen in the 1990s and the post-2008 era were often punctuated by "mini-cycles" or corrections that kept the engine running. Notably, the brevity of the 2020 recession was largely due to unprecedented money printing. This intervention may have simply kicked the can down the road, creating a more extended and potentially more volatile current cycle.
The reality is that a lot of millennials like myself haven't really experienced a full business cycle.
A New Formula for Visualizing Market Extremes
To truly see the business cycle, we must look beyond the price of the S&P 500. A more accurate visualization involves punishing the metric when the labor market weakens and accounting for the Federal Reserve's dual mandate. By squaring the unemployment rate in the denominator and multiplying the result by inflation and interest rates, a clear pattern emerges. This formula highlights the "bubble-like" behavior of the late 90s and the 2008 financial crisis with startling clarity.
The Role of the Labor Market
The labor market is the final pillar of the economic expansion. When unemployment is low, the cycle can feel invincible. However, once the unemployment rate begins to rise in a non-linear fashion, it often triggers a negative feedback loop: layoffs lead to decreased demand, which leads to lower corporate earnings, resulting in further layoffs.
Historically, when the unemployment rate starts to go up, that’s when you lead into the final phases of the business cycle.
Navigating the Risk Curve
One of the most reliable signals of a maturing business cycle is the "bleeding" of liquidity down the risk curve. This process usually begins with the most speculative assets. We have seen altcoins lose value against Bitcoin for years, followed by Bitcoin beginning to show weakness against the S&P 500. Eventually, even the stock market begins to struggle against "safe haven" assets like gold.
The S&P 500 vs. Gold Ratio
History provides a warning when the stock market begins to break down against gold. Similar breakdowns occurred in 1973 and 2008, both of which served as precursors to significant market corrections. Today, we are seeing a similar trend. While the S&P 500 may be near all-time highs in nominal terms, its value relative to gold is beginning to falter, suggesting that the "smart money" is already seeking protection.
The World Uncertainty Index
Global markets are currently facing a historically high level of uncertainty. Whether through geopolitical tensions or shifting fiscal policies, the World Uncertainty Index is at levels not seen since its inception in 1990. As the old adage goes, "markets hate uncertainty," and this elevated risk environment makes a smooth "soft landing" increasingly difficult for the Federal Reserve to engineer.
Energy: The Final Sector to Fall
Investors often look to the energy sector (XLE) as a barometer for the very end of the cycle. Because global energy demand is structurally high, energy stocks tend to stay bullish much longer than the tech or consumer sectors. In 2000 and 2008, the energy sector continued to climb for months after the S&P 500 had already topped out.
The only force strong enough to significantly dampen energy demand is a full-blown recession. Therefore, as long as energy remains robust while the rest of the market stalls, it suggests we are in the "final act" of the current expansion. Once energy begins to roll over, it is often a sign that a recession is no longer a risk, but a reality.
Strategic Preparation for the Next Pivot
The goal of visualizing the business cycle isn't to spark panic, but to encourage strategic positioning. If the current cycle is expected to conclude within the next two to three years, the time to prepare is while markets are still near their peaks. This involves diversifying out of purely high-risk assets and building a "war chest" of cash and defensive positions.
The Value of Cash in 2026 and Beyond
While inflation makes holding cash unattractive during an expansion, cash becomes a powerful tool during a hard landing. Having liquidity allows an investor to "buy the blood" when valuations eventually return to historical norms. Being 100% invested at the top of a cycle leaves an investor "stuck," forced to wait years for a recovery rather than capitalizing on the downturn.
Markets hate uncertainty.
Conclusion
The business cycle is an inevitable part of the capitalist machine. Whether the Federal Reserve manages to orchestrate a soft landing or we face a more traditional hard landing, the expansion will eventually give way to a new phase of the cycle. By understanding the relationship between the labor market, inflation, and asset rotation, investors can move beyond the noise of daily price action. Preparing for the end of a cycle is not about being a "permabear"; it is about ensuring you have the resources to be an aggressive buyer when the next cycle begins. For those who can navigate these waters with a clear head, the conclusion of one business cycle is simply the best opportunity to build wealth for the next one.
For more detailed analysis and recent reports on market positioning, you can visit BenjaminCowan.com to explore the latest Macro Risk Memos and premium insights.
