The economic cycle, also known as the business cycle, refers to the fluctuations in economic activity between periods of expansion and contraction. The cycle is characterized by four stages: expansion, peak, contraction, and trough . The expansion stage is marked by rapid growth, low-interest rates, and increased production. During this stage, economic indicators such as employment, wages, corporate profits, and output tend to show sustained uptrends. The peak stage is when growth hits its maximum rate, and prices and economic indicators may stabilize for a short period before reversing to the downside. The contraction stage occurs when growth slows, employment falls, and prices stagnate. As demand decreases, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in prices. If the contraction continues, the recessionary environment may spiral into a depression. The trough stage is reached when the economy hits a low point, with supply and demand hitting bottom before recovery .
Market cycles, on the other hand, refer to the cyclical nature of the stock market. The market cycle has four stages: accumulation, markup, distribution, and markdown . The accumulation phase is the point at which markets resume trading after a long period of pessimism. Value investors typically enter the market at this point. The markup phase is characterized by stable markets that gradually show highs. The distribution phase is a stage of optimism, and the final phase of the market’s cycle is the markdown phase .
The timing of market and economic cycle phases is crucial for investors and businesses. Equity markets typically anticipate the business environment six to eighteen months ahead, so market cycles usually lead economic cycles . Investors look for indications of where the economy will be in the future by keeping tabs on central bank policy and economic data. Understanding the economic period can help investors and businesses determine when to make investments and when to pull their money out, as each cycle impacts stocks and bonds as well as profits and corporate earnings .
In conclusion, the economic cycle and market cycle are two distinct but related phenomena that impact the economy and the stock market. The economic cycle is characterized by four