People who did not identify the condition of the economic cycle did not get out of the stock market before the Great Recession struck and thus contributed to the Great Recession. They were also concerned about re-entering the stock market at the start of an expansion cycle, which worsened the situation. That is the most appropriate moment to do so.
While it is impossible to predict the market precisely, you may increase your profits by becoming more adept at recognizing the economic cycle and its phases. After that, you may alter your asset allocation to take advantage of the available stages.
- The COVID-19 pandemic, which began in February 2020, triggered a recession.
- After June 2009, the American economy was in a period of growth for the next 11 years.
- Keep an eye on the following economic indicators to see how the economy is doing: The jobless claims, the consumer sentiment index, and the housing sector are all included.
- Maintain a diverse portfolio of investments to manage your investment risks.
There are four phases to the business cycle. The business cycle is divided into four stages.
- Expansion: The economy is expanding at a robust 2 percent to 3 percent annual rate. The stock market has entered a bull market.
- Peak: The economy increases by more than 3% per year at its highest point. Inflation causes prices to rise. There are asset bubbles to be aware of. “Irrational exuberance” has gripped the stock market, according to experts. Various commentators have declared that we have entered a “new normal.”
- Economic growth slows: But it is not harmful, and employment decreases as a result of contraction. The stock market has entered a bear market.
- Trough: The moment at which the contraction is at its smallest before the following expansion starts.
Business Cycle Currently in Effect
- In February 2020, the economy of the United States began the contraction phase of the economic cycle. The COVID-19 epidemic forced state governments to shut non-essential enterprises in March as a precautionary measure. In April, there were 23.1 million jobless people in the United States, bringing the unemployment rate to 14.8 percent.
- Before then, the economy had been in a period of growth for 11 years prior. The most recent dip occurred in June 2009.
- We have most likely hit the bottom of the 2020 recession, and the Federal Reserve predicts that unemployment will recover to 5 percent in 2021, according to their projections.
- Based on the rise and fall of the gross domestic product, the line chart below depicts how the current economic cycle progresses. Expansion stages often span between five and ten years.
- Even before the pandemic outbreak, many individuals were predicting that a recession was on its way. When it came to recognising when growth had reached its zenith, there were none. Instead of inflation, asset bubbles sprang up all over the place. In 2015, it was expressed in terms of the United States dollar.
- The lack of demand for the euro led to the rise in the value of the dollar. Right before the Great Recession of 2008, the housing market experienced an asset bubble. Seven asset values can experience irrational exuberance at the top of an economic cycle without causing general inflation.
Here are several typical signs of a recession that may be seen even before the formal declaration of a recession.
Five hundred of the most valuable publicly listed companies in the United States are included in this compilation. While the Dow Jones Industrial Average consists of 30 companies, the 500 index consists of 200 firms. So the S&P 500 index provides a more comprehensive picture of the state of the United States economy at any particular moment.
Unemployment Insurance Claims:
By 2018, the number of employees seeking unemployment benefits has fallen to fewer than 4% of the workforce, down from 10% in 2009 and more than 20% in 2007. On a broad level, increasing unemployment rates are often seen as a sign of economic difficulty, while decreasing unemployment rates are frequently perceived as a sign of economic prosperity.
However, like with any possible indication, it is essential to delve beyond the surface. For example, the unemployment rate only considers either employed or actively looking for a job. Those who do not work because they do not want to are not counted. According to the Bureau of Labor Statistics in the United States, the number of 16- to 24-year-olds who are not working because they are attending school has increased since 2009, although the unemployment rate has decreased.
Consumer Confidence is an essential factor in every business:
The consumer confidence index measures people’s willingness to make purchases in the following 12-month period. A number more significant than 100 shows that people want to spend their money, while a rating lower than 100 suggests that people intend to save their money and defer big purchases for the time being. Generally speaking, the less eager individuals are to spend their money, the more detrimental this is to the economy.
- New buildings and increasing house prices are considered reasonable indications for the economy and the economic cycle, and both are expected to continue shortly. On the other hand, if new development slows down or current house values stagnate, this may indicate that the market is in danger.
- Always keep in mind that no one indication should be regarded in isolation and that you should always search beyond the headlines for clues. For example, the new building may be stalling due to tariffs raising the cost of imported timber. Other economic indicators may nevertheless point to a healthy economy. Commodity prices, the consumer price index, and the producer price index are some additional possible indicators worth keeping an eye on.
How to Protect Yourself throughout the Process:
When you wish to invest in particular funds or stocks, you should consult a qualified financial advisor. To determine what tends to do better in each part of the economic cycle, the following criteria should be followed:
- Constriction: Keep your muscles stiff. If you haven’t sold your equities by the time the economy begins to shrink, it’s likely too late. Some assets may be transferred to bonds or cash, while others could be retained as stocks. You want to be there to grab the rebound when it happens. When the recession is well started, the vast majority of investors sell their equities. This is because they do not purchase them until it is too late. A recession or bear market typically lasts between six and 18 months in duration. 14
- Trough: Begin adding equities and commodities such as gold, oil, and real estate to your investment portfolio. During a recession, they should be more affordable.
For obvious reasons, selling stocks when everyone else is boasting about how much they’re earning is very tough. It is almost difficult to predict when the market will rise or fall. Instead, take a cautious approach. Never put all of your money into a single asset class; this is a recipe for disaster. Instead of this, make sure that your assets are diversified. Gradually increase or decrease the percentage to remain in sync with the economic cycle. Always consult with a financial advisor to ensure that the allocation corresponds to your particular objectives.