What Is a Normal Stock Market Cycle?

Most bull (up) market cycles last two to four years and are followed by a recession or bear (down) market and eventually another bull market in common stocks.

In the beginning phase of a new bull market, growth stocks are usually the first sector to lead the market and make new price highs. Heavy basic industry groups such as steel, chemical, paper, rubber, and machinery are commonly more laggard followers.

Young growth stocks will usually dominate for at least two bull market cycles. Then the emphasis may change for the next cycle, or a short period, to turnaround or cyclical stocks or newly improved sectors of the market, such as consumer growth stocks, over-the-counter growth issues, or defense stocks that sat on the sidelines in the previous cycle.

Last year's bloody bums become next year's heroes. Chrysler and Ford were two such spirited turnaround plays in 1982. Cyclical and turnaround opportunities led in the market waves of 1953—1955, Requiring a company to show two consecutive quarters of sharp earnings recovery should put the earnings for the latest twelve months into,
or very near, new high ground.

If the 12 months earnings line is shown on a chart, the sharper the upswing the better. This will make it possible in many cases for even the "old dog" about-face stock to show some annual growth rate for the prior five-year time period. Sometimes one
quarter of earnings turnaround will suffice if the earnings upswing is so dramatic that it puts the 12 months ended earnings line into new highs.

1963-1965, arid 1974-1975. Papers, aluminums, autos, chemicals, and plastics returned to the fore in 1987. Yet, even in these periods, there were some pretty dramatic young growth stocks available. Basic industry stocks in the United States frequently represent older, more inefficient industries, some of which are no longer internationally competitive and growing. This is perhaps not the area of America's uture excellence.

Cyclical stocks' price moves tend to be more short-lived when they do occur, and these stocks are much more apt to suddenly falter and encounter disappointing quarterly earnings reports. Even in the stretch where you decide to buy strong turnaround situations, the annual compounded growth rate could, in many cases, be 5% to 10%.