Cycles exist everywhere. One of the first cycles we learn about as a child is the water cycle or the journey of a raindrop. There’s something about the circularity of cycles that I just love.
The economy and financial markets also cycle. An economic cycle is the periodic ebb and flow of economic growth like Gross Domestic Product or employment. According to the National Bureau of Economic Research the average economic cycle lasts a little less than six years. This span is measured both from one peak to the next peak or one trough to the next trough. While six years is an average, the cycle can be much quicker or much longer than six years.
The Cyle of Economic “Seasons”
The various stages of the economic cycle can be thought of like seasons of the year as shown in the chart below. From winter, or recession, where jobs are lost and the economy is shrinking to summer, where growth is accelerating and jobs have been recovered.
Every quarter we take a poll at The Center to see where team members think we fall in this spectrum. Our consensus is that we believe we are in the midst of summer meaning that this bull still has some room to go as we are still lacking some keys signs of a maturing economy like inflation and volatility.
Stock Market Cycles
The stock market also goes through cycles and, along with it, investor emotions ebb and flow. Usually the stock market cycle is slightly ahead of the economic cycle meaning that market indexes often peak before the economic cycle peaks. Our latest survey of our employees placed the stock market cycle near excitement in the picture below. At this point (excitement/thrill/euphoria) investors start to question why they don’t have more aggressive positions because they have clearly performed very well and many even start to shift their portfolios in this direction. As Warren Buffett said”
“Be fearful when others are greedy and greedy when others are fearful.”
Refocusing on the Long Term
This is the point when it is most important to stay in a diversified portfolio, not abandon your long-term investment objectives while reaching for more returns. Rebalancing at these market extremes may go against what investors want to do, for example, selling your stock positions to buy more bonds right now or selling your bonds in 2009 to buy more stocks. However, going against these basic emotions have potential to be the best decisions you can make for your portfolio. Navigating these emotions is the single most difficult road block to the success of an investment strategy. While markets and economies will cycle as long as water continues to cycle, having sound financial advice during these market extremes can make big difference in the success of your long-term financial plans.
Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless ofstrategy selected. C14-031971