Ortec Finance Business Cycle Indicator
Make the right strategic investment decisionsBased on a clear picture of your business cycle
Importance of understanding business cycles for decision making
Business cycles are a main driver of risk-and-return on short- to medium-term horizons. It is therefore very valuable to get a feeling for where we currently stand in terms of the business cycle as well as where we may likely be heading. Business cycles are one of the defining characteristics of realistic market behavior (“stylized facts”) in asset prices, volatilities, level and slope of yield curves, as well as in the broader macro-economic environment. Therefore, it is important to take business cycles into account when making investment decisions. Burns and Mitchell (1946) define business cycles as “a type of fluctuations found in the aggregate economic activity of nations that organize their work mainly in business enterprise”. Gyomai and Guidetti (2012) at the OECD describe business cycles as “recurrent sequences of alternating phases of expansion and contraction in economic activity”.
The Ortec Finance Business Cycle Indicator (OF BCI).
This visually intuitive tool provides both a historical perspective on the business cycle, our estimate of its current state as well as forward looking projections including the uncertainties of where the business cycle may be heading. The scenarios of the OF BCI are important drivers of medium-term economic growth, equity returns and credit spread.
What was the methodology used to construct the tool?
Lee and Steehouwer (2012) describe the methodology underlying the construction of the OF BCI. The values of the Indicator series are normalized to a standard deviation of 1. Values above 0 mean that economic activity (growth, equity returns, etc.) are above their underlying trend, values below 0 mean that economic activity is below trend. More specifically, four consecutive phases can be distinguished: (i) the “expansion” phase - above trend and increasing, (ii) the “slowdown” phase - above trend and decreasing, (iii) the “contraction” phase - below trend and decreasing, and finally (iv) the “recovery” phase - below trend and increasing.