On business cycles… and when trend following works

The US just celebrated its longest economic expansion on record, with markets and policy makers anxious about a slowdown in global growth. Given any likely slowdown, investors may want to allocate more to defensive strategies in anticipation of a shift in the economic cycle. However, economic (or business) cycles are indistinctly defined, notoriously difficult to time, and, since each business cycle exhibit idiosyncratic features, unreliable as a repeatable investment conditioner. In lieu of depending on competing, ‘official’ definitions of business cycles, we propose a simple macroeconomic-quadrant model, which measures the “accelerating” and “decelerating” GDP and inflation dynamics of an economy. We then assess how a trend following strategy performs based on this objective business cycle definition.