Market Cycles
Candlefocus EditorThe four distinct periods of a market cycle are Expansion, Peak, Contraction, and Trough.
1. Expansion: The expansion phase of a financial cycle is characterized by increasing levels of economic activity, strong investment and consumer demand, and rising asset prices. This is a time of optimism when companies expand production and hiring. This can also be seen on the stock exchanges and emerging markets when stocks are on the rise and reach a high level.
2. Peak: During the peak phase, production is expected to be at its highest and wages are likely to increase. This is when companies start to have difficulty maintaining their levels of production and the stock market reaches an all-time high. The peak phase is usually followed by a sudden and steep drop in stock prices.
3. Contraction: The contraction phase is characterized by a downturn in economic activity, lower demand and wages, and falling asset prices. This is when profits are reduced, production slows down and companies start laying off workers. Asset prices also tend to fall.
4. Trough: In the trough phase, economic output typically declines and unemployment rises. Share prices usually remain low during this period until new investments are made. Companies struggle to maintain their operations and the stock market hits its lowest point.
The cycle acts as an indicator of economic health and helps to inform investment strategies and decisions. While it is impossible to predict when a market cycle will start its next boom or bust, it is important to understand the underlying patterns and movements that come from the cycle. As a result, it is important to take into account the current market cycle when investing or making major financial decisions. Recognizing the current stage of a cycle is a critical step in formulating an effective long-term financial strategy.