Business and financial cycles are different but an important indicator

The idea of a countercyclical risk premium tied to consumption asset pricing models is the standard view in macrofinance, but there is also a growing view that there is a financial or credit cycle with booms peaking before macroeconomic real behavior. Equity and factor premium are tied to credit availability and balance sheet constraints. Hence, investors should not just look at business cycles, which are intermittent, but also at the financial environment to capture poor financial environments. See the paper "Financial and Business Cycle Risk Premia". 

Using a Markov switching model, the author identifies financial and business cycle regimes. Recession states suggest that there will be higher equity excess returns the following quarter, but this equity premium will be even greater if it is consistent with a financial crisis. This impact is even greater if the poor regimes are matched with deteriorating macro conditions. There will be higher unconditional equity returns if there are favorable financial conditions. 

Regardless of the model being used, knowing where you are positioned relative to the business and financial cycles is critical. While the extremes in the business and financial cycle are not frequent, tracking these regime changes will have an appreciable impact on asset allocation.