Is it time to cash out of the stock markets? How investors should react to signs of a coming downturn

It’s easy to blame the current noise and volatility in financial markets on the brewing trade spat between the United States and a range of countries, most notably China. But scratch a little beneath the surface and there is a bigger underlying worry: the economic cycle is undeniably getting very long in the tooth. How much longer can it run?

Most of this discussion in financial markets anchors around the US economy. As maddeningly as this US-centred approach can often feel to investors in Asia, there’s good reason for it. Since the second world war, only the US economy has been big and interconnected enough to drag down the world economy with it, when it goes into recession (that is, shrinks for at least two quarters).

Of course, the worries about trade and recession are linked. As it gets later in its cycle, an economy becomes more vulnerable to damaging events. As interest rates rise and business and consumers increasingly get stretched, the economy runs out of shock absorbers. And an escalating trade war could conceivably be just such a shock. Although, to tip the US and global economy into recession, current tensions would have to grow into something much bigger than currently looks likely. Growth is still far too robust for that.