- Early cycle: Generally, a sharp recovery from recession, as economic indicators such as gross domestic product and industrial production move from negative to positive and growth accelerates. More credit and low interest rates aid profit growth. Business inventories are low, and sales grow significantly.
- Mid-cycle: Typically the longest phase with moderate growth. Economic activity gathers momentum, credit growth is strong, and profitability is healthy as monetary policy turns increasingly neutral.
- Late cycle: Economic activity often reaches its peak, implying that growth remains positive but slowing. Rising inflation and a tight labor market may crimp profits and lead to higher interest rates.
- Recession: Economic activity contracts, profits decline, and credit is scarce for businesses and consumers. Rates and business inventories gradually fall, setting the stage for recovery.
A typical business cycle contains 4 distinct phases. Historically, different investments have taken turns delivering the highest returns as the economy has moved from one stage of the cycle to the next. Due to structural shifts in the economy, technological innovation, regulatory changes, and other factors, no investment has behaved uniformly during every cycle. However, some types of stocks or bonds have consistently outperformed while others have underperformed, and knowing which is which can help set realistic expectations for returns.
1 Comment
9/27/2021 09:56:39 pm
Thanks for writing an article that I found easy to read and understand. I just found this site and am looking forward to reading more of your posts!
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