Stages of a Stock Market Cycle

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Stages of a Stock Market Cycle

The winning investor should understand how a normal business cycle unfolds and the duration of these periods, paying particular attention to recent cycles. There is no foolproof guarantee that stock market cycles will last diree or four years because it happened that way in the past.

Dedicated market students who desire to learn more about cycles and the longer-term history of U.S. economic growth may want to write to Securities Research Company, 101 Prescott Street, Wellesley Hills, MA 02181 and purchase one of their excellent long-term wall charts. The stock market ordinarily bottoms out while business is still on a downtrend, anticipating economic events months in advance. Analysts refer to this phenomenon as "discounting of the future." In like manner, bull markets frequently top out and turn down before economic recession begins.

Therefore, using economic indicators to tell you when to buy or sell the stock market is generally an exceedingly poor procedure. Yet some firms have people trying to do this very thing. It's a somewhat ridiculous approach, but it does seem to make those
who don't understand the stock market very well feel better.

Ironically, economists also have a rather faulty record of predicting the economy. A few of our U.S. presidents, themselves lacking sufficient understanding of the American economy, have had to learn this lesson the slow, hard way. Around the beginning of 1983, just as the economy was in its first few months of recovery, the head of President Reagan's Council of Economic Advisors was a little concerned because the capital goods sector was not very strong. This was the first possible hint that this particular advisor might not be as thoroughly sound as he should be, because capital goods demand is never good at the early stage of economic recovery, and particularly so in the first quarter of 1983, when American plants were operating at a low percentage of capacity. You should check earlier cycles to learn the sequence of industry group moves at various stages of the market. For example, railroad equipment, machinery, and other capital goods industries are late movers in a business or stock market cycle. This knowledge can help you determine what stage of the current market period you are in. When these groups start running up, you know you're near the tail end.