So, what is a business cycle?
We'll give you a hint: it's not that Peloton exercise bike in your office!
A business cycle describes how an economy evolves over time, characterised by 4 distinct stages which we’ve outlined below along with an analogy from the four seasons - because, nature ❤️:
Trough
This is the “bottom of the market” where things have gone so bad for the economy that it's difficult for things (economic data, stock prices, that "doom and gloom” feeling) to get much worse.
Seasonal analogy: If you live in the northern hemisphere, you can think of this phase as how you might feel during the hardest winter months of January and February - the storms have done their damage and (hopefully) you’ve done your best to stay out of them!
Expansion
This is the recovery phase, where things stop being absolutely hopeless and we start seeing small but promising signs of recovery, which go on to fuel economic growth and rising stock prices as a result. We’ve had an expanding global economy since the end of the financial crisis almost a decade ago (time flies, doesn’t it?) - and while it may not sometimes feel like it, this has been one of the longest running economic recoveries in history!
Seasonal analogy: Think of this as how you might feel during Spring when birds start tweeting and fresh leaves begin to sprout. Ah, sweet, sweet, hope.
Peak
This is the point where things have been going so well for so long that you start wondering whether things can realistically get any better in the economy (think of low unemployment / plenty of jobs available - even your neighbour’s dog has a couple of interviews lined up, stock markets reaching record highs, that “bull market” feeling - sound familiar?). Given the extraordinary length of our most recent economic expansion, investment professionals have been questioning in 2019 whether a recession is just around the corner...
Seasonal analogy: Obviously, this is “Summertime”! **cue Will Smith**
Contraction
This is the “slump” where things have just become too good to be true, and the economy stops expanding as we might expect it to, usually in response to some sort of shock (think US / China trade war, Brexit in recent times or the Global Financial Crisis and Dot Com bubble in the 00’s). Economic data worsens, unemployment often rises, stock prices fall and your stomach churns at that impending “doom and gloom feeling” you know is waiting for you like a monster under your bed.
Seasonal analogy: This would most definitely be *that* Autumnal feeling we can all probably relate to!
Why does this matter for you?
Well - stock markets are one of the primary indicators of which stage of the business cycle we might be in - worth keeping an eye on this stuff if you feel a recession is headed your way sometime soon!
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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