By: Reed Fraasa, CFP®, RLP®, AIF®
As we enter the new year, many of you have raised an important question: Where do we stand in the economic cycle?
This question is both timely and prudent. The current landscape presents a complex mix of signals—renewed trade policy uncertainty, geopolitical developments, currency fluctuations, moderating employment trends, and persistent inflation considerations. Yet economic growth continues, unemployment remains contained, and corporate fundamentals have demonstrated resilience. While these conditions may appear contradictory, they are characteristic of a mature economic expansion—a phase that typically requires more careful navigation than earlier stages of the cycle.
Late Cycle: A Phase, Not a Prediction
Economic cycles evolve gradually, and inflection points rarely announce themselves in advance. During early expansion, growth tends to be broad-based, and confidence builds steadily. In later stages, progress continues, but risks become more pronounced and outcomes more varied.
We believe we are currently in this latter phase of the current economic expansion. An expansion phase that started in May 2020, making it one of the longest expansions in recent history. Some of you may question why the expansion didn’t start after the bad year we had in 2022, but that was a stock and bond market event, not an economic contraction resulting in a recession. GDP slowed down in 2022, but we did not have a recession.
Growth has moderated from peak levels while remaining positive. Inflation has declined but persists above historical norms. Labor markets have loosened without deteriorating. Financial markets have become increasingly sensitive to policy developments and geopolitical events.
Late-cycle conditions are characterized not by imminent recession, but by reduced room for policy or economic error.
Labor Market Dynamics: Normalizing, Not Weakening
The U.S. labor market has been a cornerstone of economic stability over recent years, with robust employment growth and wage gains supporting consumer spending and extending the expansion.
Recent data suggests normalization is underway:
Hiring pace has moderated
Job openings have declined from elevated levels
Wage pressures are easing
Employer selectivity has increased
This evolution is typical of a maturing expansion. A moderating labor market can help contain inflationary pressures while potentially reducing economic momentum—a balance we continue to monitor closely.
From a planning perspective, current conditions reflect a transition from acceleration to stabilization rather than deterioration.
Inflation: Progress Made, Risks Remain
Inflation has declined meaningfully from recent peaks, improving real purchasing power and providing central banks greater policy flexibility. However, inflation risks today stem less from excess demand and more from supply-side disruptions.
Tariff policies affect input costs. Geopolitical tensions influence energy and commodity markets. Dollar weakness can elevate import prices. Sector-specific labor constraints persist.
In late-cycle periods, inflation tends to become less predictable rather than following a steady downward trajectory. This underscores the importance of constructing portfolios that are resilient across multiple inflation scenarios rather than relying on a single forecast.
Trade Policy and Geopolitics: Amplified Impact
Trade and geopolitical developments carry greater weight during late-cycle phases. When growth is robust and accelerating, economies can more readily absorb shocks. As growth moderates, identical disruptions have disproportionate effects.
Trade policy uncertainty can:
Elevate consumer prices
Compress corporate profit margins
Defer capital investment decisions
Increase market volatility
Similarly, geopolitical developments—whether involving energy security, strategic resource access, or shifting global alliances—introduce uncertainty around growth trajectories, trade relationships, and capital allocation.
While individual risks may be manageable in isolation, their cumulative effect expands the range of potential outcomes—a condition that typically challenges market stability.
Currency Movements: Diversification in Practice
The U.S. dollar has retreated from recent highs, reflecting evolving fiscal dynamics, interest rate expectations, trade policy uncertainty, and shifting global capital flows.
Dollar weakness presents mixed implications:
Potential support for U.S. exporters and multinational earnings
Enhanced returns from international holdings when converted to dollars
Possible inflationary pressure through higher import costs
From a portfolio construction standpoint, currency fluctuations reinforce the value of geographic diversification and avoiding over-concentration in any single economic outcome.
Our Investment Approach in the Current Context
Environments such as this validate our emphasis on comprehensive asset allocation and disciplined risk management rather than tactical market timing.
Economic cycles are unavoidable. What determines outcomes is how portfolios and financial plans are structured to withstand them.
Our investment philosophy rests on several foundational principles:
Diversification — Allocation across asset classes, geographies, and strategies to reduce dependence on any single return driver
Risk Management — Acknowledging that markets respond to unforeseen events, making preparation more valuable than prediction
Long-Term Perspective — Aligning investment strategy with life objectives rather than near-term market movements
Systematic Discipline — Maintaining rebalancing protocols and asset allocation targets, particularly during volatile periods
Late-cycle environments reward preparation over precision.
Portfolio Positioning and Client Considerations
We assess the economy as advanced in the current cycle while not necessarily approaching imminent contraction. Growth persists, labor markets remain functional, and inflation has moderated—albeit with vulnerability to disruption. Risks are elevated, yet from a position of relative economic strength.
This environment does not warrant wholesale portfolio repositioning or reactionary decision-making. Historical evidence demonstrates that the most significant portfolio damage occurs when uncertainty prompts abandonment of sound investment plans.
We recommend clients focus on:
Reaffirming long-term financial objectives
Ensuring portfolio construction aligns with risk tolerance and time horizon
Maintaining appropriate diversification and liquidity reserves
Emphasizing financial planning over market prediction
Conclusion
Economic cycles transition gradually as pressures accumulate over time rather than through discrete events. While uncertainty has increased, economic fundamentals remain intact—and markets continue to reward patient, disciplined investors.
Our responsibility is not to forecast the precise next phase of the cycle, but to ensure your financial plan and investment portfolio are structured to navigate whatever emerges.
This remains our commitment as we move through the year ahead.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.
Should you have questions about your specific situation or wish to discuss your portfolio in greater detail, please contact our office to schedule a review.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
The above article was written with the assistance of artificial intelligence (AI).