The Typical Market Cycle

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All stock marketer should be aware about Typical market cycle, because unless we understand it, we will be able to earn less profit.

The Typical Market Cycle

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Typical Market Cycle

Good traders know that central banks have huge influence over the outcome of financial markets but it is the market cycle and real economics that ultimately drives prices. The stock market is a big influence, since it is arguably the market that is most clearly affected by changes in economic fundamentals.

Financial markets are always interconnected with one another, so no matter what asset you trade you must have a clear understanding of the outlook for the stock market. One way to do this is to have a sound understanding of a typical market cycle.

1. Coming to the end of the Market Cycle

During the latter stages of a bull market, such as experienced in 1999 and 2007, there is typically strong economic growth and high levels of optimism among market participants. It is during this time that the market cycle nears its peak. Consumer confidence is likely high, interest rates rise and cyclical stocks begin to outperform. It is not always the case, but these are the usual characteristics of a maturing market.

As markets move up, rising interest rates become an ever stronger threat to economic growth and markets begin to slow in momentum. Lending money becomes more expensive and thus risk taking begins to drop, leading to investors seeking more secure places to invest – such as utility and value stocks.

This in turn leads to sharp falls in the growth stocks that were previously in charge and mounting pessimism begins to set in as the main driver. As pessimism increases, economic growth begins to fall and small cap stocks and growth stocks bear most of the pain.

In order to address the decline in growth, interest rates start to fall and the stock market most likely enters a prolonged bear market. Traders begin to sell higher yielding investments and move into safer investments such as bonds, utility stocks or safe havens.

2. Restarting the Market Cycle

As interest rates fall and pessimism takes hold, markets keep dropping until they reach a selling climax, where optimism is at its lowest. It is at this point when markets are washed out and at their lowest ebb that the cycle can begin again. Fuelled by the prospect of now low interest rates, and improving economic growth, small cap stocks and growth stocks take over and markets start to rise.

Since the stock market looks ahead, this rise is often happening well in advance of any corresponding uptick in GDP or unemployment. In this way, the stock market is the ultimate leading indicator into future economic growth.

It is important to understand the market cycle. Although no cycle is ever the same, it is generally the case that riskier assets and small cap stocks do better in the beginning stages of bull markets. Whereas in bear markets, bonds and defensive stocks do better. As do safe-haven currencies such as the US dollar, the Swiss franc and the Japanese yen.

Conclusion:

We hope to have understood about the typical market cycle. To earn more profit, you have to be associated with this field, more and more books, courses can make you the king of the stock market. Do read our other important articles.

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