Let's have a look at the market cycle and its distinction from the business cycle.
The business cycle describes the periodic expansion and contraction of economic activity that is inherent to an economy's nature.
It is influenced by a range of diverse factors, fluctuations in consumer and business confidence, shifts in monetary and fiscal policy, unforeseen external shocks, and the drumbeats of technological advancements.
In contrast, the market cycle refers to the ebb and flow of asset prices within financial markets, which include the arenas of stocks, bonds, and commodities.
These cycles are marked by bullish periods of price increases and bearish periods of price declines.
To track the market cycle's progress, we often utilize benchmarks like the S&P 500 for stocks which reflect the collective performance of a portfolio of assets.
These benchmarks are subject to the ebb and flow of several variables, the prevailing economic climate, corporate earnings reports, interest rate movements, and the broad spectrum of investors sentiment.
Additionally, they can be swayed by speculative currents, global political developments, and policy changes.
It is important to note that while there is a relationship between business and market cycles with economic growth, typically accompanying equity bull markets and downturns coinciding with bear markets, their movements are not always in sync.
Financial markets with a forward-looking lens can move in anticipation of expected economic conditions, potentially leading or lagging the actual business cycle as documented on the chart, which shows that the equity market bottomed out and started to rise before the end of the recession.
