Capital IdeasTM

Investment insights from Capital Group

Market Volatility
Financial cycles peaking: expect distress ahead?
Jens Søndergaard
Currency Analyst

Financial cycles serve as a one-stop measure of the strength of the combined housing and credit cycle and previous peaks (in 1988 and 2006) have coincided with periods of financial distress.

When financial cycles accelerate, we see strong credit growth, a housing boom and high GDP growth; at some stage, however, the cycle peaks and then comes private sector deleveraging, housing busts and low to negative GDP growth − potentially followed by financial distress and banking crises.

The US financial cycle is expected to peak and roll over later in 2023, with most developed markets also at or just past their own peaks, and in this piece, Jens Søndergaard examines what this backdrop could mean for the macro outlook.

Financial cycles usually last much longer than business cycles, which track economic expansions and recessions: a good analogy is to think of financial cycles as seasons and business cycles as changing weather patterns. There are four distinct phases of a financial cycle, corresponding to the trend of leverage in an economy, and turning points often coincide with changing fortunes for equity and bond markets.

Analysis of more than 40 years of asset class returns shows that bonds have tended to fare better than equities around financial cycle peaks, while equity returns have typically been stronger around cycle troughs.

Financial cycles peaking: expect distress ahead?

Source: Capital Group. Data presented are for informational purposes only and not intended to provide any assurance or promise of actual results. Analysis results are highly dependent on our assumptions and actual results may vary significantly because future market characteristics may not match our assumptions. 

Jens Søndergaard is a currency analyst at Capital Group. He has 17 years of investment industry experience and has been with Capital Group for 10 years. Earlier in his career at Capital, he worked as an economist covering the Euro area and the UK. Prior to joining Capital, he was a senior European economist at Nomura, a senior economist at the Bank of England and an assistant professor at The Johns Hopkins University. He holds a PhD in economics and a master’s degree in foreign service from Georgetown University. Jens is based in London.

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.