Fox-Trot Economy

What Is a Fox-Trot Economy?

A "fox-trot economy" refers to a pattern of economic growth where periods of rapid expansion are followed by periods of slow growth. Economic growth occurs when an economy's ability to produce more goods and services increases from one period to the next, which can result from such things as more workers entering the workforce or advances in technology.

Understanding a Fox-Trot Economy

The ability to grow an economy and create economic growth can occur rapidly or more slowly, and it may even decrease. Many different factors can influence the rate of growth in an economy, and the rate will usually vary over time. Although there are no concrete rules that accurately predict exactly how an economy will grow, patterns of economic growth can still be described, and the fox-trot economy is one such pattern.

The term "fox-trot economy" is attributed to investment strategist Jeffrey Saut, an executive at Raymond James. He coined and popularized the phrase in the early 2000s to describe economic growth at the time.

The term is based on the popular fox-trot ballroom dance. In a well-known version of this dance, participants complete steps in a pattern of two fast steps that are followed by two slow ones. An economy that goes through a period of fast growth followed by a period of slow growth, while still showing overall growth throughout the cycle, mirrors the fast-step, slow-step movements of the fox-trot, as the dancers continue to move throughout the dance. 

The Impact of a Fox-Trot Economy

A fox-trot economy can be challenging for investors. Although the expectation in a fox-trot economy is that economic growth will pick back up again, identifying the timing of the return to rapid growth is challenging.

In a fox-trot economy, greater economic uncertainty regarding potential financial or economic shocks can result in volatility in the rate of macroeconomic growth, which in turn can lead to lower rates of return on many assets and higher risk premiums on business borrowing. Economists have documented clear links, both theoretically and empirically, from the volatility of economic fundamentals to stock market volatility.  

In a fox-trot economy, corporate earnings may exhibit higher volatility than is typical over a normal business cycle with level economic growth. This can directly impact a company's valuation. Rapid growth followed by more tepid growth may cause companies to cut payroll and remain excessively cautious about investment plans, even though the economy, in general, is growing, albeit at a slower pace. Investors, businesses, and consumers may shift more of their savings and investments to more relatively stable foreign markets.

Likewise, the demand for borrowing and lending affects an economy's interest rates, and as economic growth slows and companies borrow less, interest rates may decline, leaving savers with a lower rate of return even as they might like to save more in order to insulate themselves from economic volatility. The loss of return on savings and the decline in jobs may impact the demand for goods and services from an economy's citizens.

In general, corporations, investors, and market participants prefer predictable, steady growth, as it is easier to manage and plan from. Conversely, many traders and investors prefer volatility, as increased volatility can amplify profits if an investor understands the technical and fundamentals behind the market movements.