When Will the Current Business Cycle Peak?

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As the bull market lengthens further, this is a natural question to ask.

This decade has brought a long economic rebound to many parts of America.

Any investor must recognize two indisputable facts. One, expansions eventually give way to recessions. Two, bull markets are punctuated by bear markets. The question is when we will see the next recession, the next bear market, or both.

All business cycles have four phases.

The first phase – expansion – is often the longest. It is characterized by two phenomena: a bull market and annualized GDP of 2% or greater. This expansion culminates at a peak, which is phase two. The peak is characterized by irrational exuberance on Wall Street, economic growth of 3% or more, a distinct acceleration of consumer prices, and the emergence of asset bubbles. (3)

Then – perhaps, imperceptibly – supply begins to exceed demand. Fundamental indicators begin to weaken; yet, the economy still grows – just not at the pace it previously did. Then, the growth diminishes altogether, and the business cycle enters phase three – contraction. GDP goes negative for two or more successive quarters, which defines a recession. Corporate earnings take a major hit, depressing investors. Equities enter a bear market. Finally, things come to a trough – a bottom. On Wall Street, institutional investors reach a point of capitulation – a moment when they decide there is more potential upside than downside to stocks. Investors and consumers start to become less pessimistic. Suddenly, supply has to keep up with demand again. Things brighten, and a new business cycle begins. (3)

How will we know precisely when the business cycle has peaked?

Without seeing the future, we cannot know. We can make an educated guess based on fundamental economic indicators and earnings, but we will really only know looking back.

How can we prepare for the later phases the business cycle?

Some healthy skepticism and some diversification may help. Investors who tend to get burned the most in an economic downturn (or bear market) are those who have fallen in love with one sector or one asset class. Their portfolios have become unbalanced, perhaps just because of the gains seen in the bull market.

Some investors opt for active portfolio management in recognition of business cycles, and their heavy influence on stock market cycles. Others choose to buy and hold, feeling that it is all too easy to mistime cycles while getting in and out of this or that investment class.

▼ Phases of the Business Cycle

Citations.

  1. inc.com/associated-press/jobs-report-october-2017.html
  2. instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm
  3. thebalance.com/where-are-we-in-the-current-business-cycle-3305593
  4. Economics for Investment Decision Makers: Micro, Macro, and International Economics 1st Edition by Christopher D. Piros (Author), Jerald E. Pinto (Author), Larry Harris (Foreword)

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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