Business cycles are a type of volatility found in a country's aggregate economic activity, which could be said to be a cycle that consists of general expansions occurring at approximately the same time in many business activities, followed by predictably general contractions (recessions). This change sequence is recurring but not periodic. An instance of an economic cycle is the business cycle.
The term "business cycle" also refers to economic trends observed in various types of business environments. It is also known as a stock market cycle, in which one security or a group of securities from the same asset class outperforms others. It could be because the current market conditions are conducive to growth based on the business model that the securities are based on. During a cycle, a company's revenue and profitability may experience rapid growth. Companies operating in a specific industry may exhibit similar cyclical patterns, which are referred to as secular. Business cycles are made up of coordinated cyclical ups and downswings in broad measures of economic activity such as yield, employment, income, and sales.
Recognizing the Business Cycle
In essence, business cycles are distinguished by the alternation of expansion and contraction phases in aggregate economic activity, as well as the comovement of financial factors in each phase of the cycle. Aggregate economic activity is represented by aggregate measures of industrial production, employment, income, and sales, as well as real GDP, which is a measure of aggregate metrics of industrial output, work opportunities, income, and sales, which are among the key consecutive economic indicators used to determine the official peak and trough dates of the US business cycle.
Business Cycles: Measuring and Predicting
The severity of a recession is calculated by the 3 Ds: intensity, dispersion, and timeframe. The magnitude of the peak-to-trough decline in broad measures of yield, employment, income, and sales determines the depth of a recession. The extent to which it has spread across economic activities, industries, and geographical regions is used to measure its diffusion. The time interval between both the peak and the trough determines its duration.
Similarly, the strength of an increase is determined by how apparent, broad, and persistent it proves to be. These three Ps are analogous to the three Ds of recession. An expansion starts at the bottom (or downward slope) of a business cycle and lasts until the next peak, whereas a recession begins at the peak and lasts until the next trough.
When a business cycle is finished, it has gone through a single boom and a single contraction in sequence. The length of the business cycle is the time required to complete this sequence. A boom is defined by rapid economic growth, whereas a recession is defined by relatively stagnant economic growth. However, these are evaluated in terms of real GDP growth that has been adjusted for inflation.
Stages in the business cycle
1. Expansion of the Business Cycle: The very first phase of the business cycle is expansion. Favorable economic indicators like employment, revenue, output, wages, profits, demand, and supply of products and services are increasing at this stage. Debtors are usually paying their debts on time, the money supply is moving quickly, and investment is high. This process will keep going as long as economic conditions are suitable for expansion.
2. Peak: This is the highest rate of growth that has been achieved. Here, the economic system reaches a saturation level, or peak, which marks the beginning of the second stage of the business cycle. At this point, customers tend to reorganize their budgets.
3. Economic downturn or recession: The recession is the phase that follows the peak. During this stage, demand for goods and services begins to fall rapidly and steadily.Producers fail to recognize the reduction in demand and continue to generate, resulting in a surplus supply in the market. As a result, all favorable economic indicators, including income, production, wages, and so forth, begin to fall.
4. Depression: Unemployment is steadily increasing, and the economy's growth rate continues to fall. When it falls below the steady growth line, the stage is referred to as a depression.
5. The trough: During the depression stage, the economic growth rate becomes negative. There will be further declines until factor prices, as well as demand and production of goods and services, contract to their lowest point. When the economy finally hits a low point, it is an economy's negative saturation point, and the national income and expenditure are severely depleted.
6. Recuperation or Recovery: Following the trough, the economic system enters the recovery stage. The economy begins to revive from its negative growth rate during this phase. Due to low prices, demand begins to increase, and supply starts to grow. Also, the population starts to develop a favorable attitude toward investment and employment, and output begins to rise.
In general, one market cycle has four distinct stages. Securities will react differently to current market conditions at each stage. In addition to this, companies selling luxury goods, for example, experience rapid growth during an upswing or boom period. The fast-moving consumer goods (FMCG) industry is expected to outperform during a downturn or recession. It is due to the increasing demands for basic necessities and consumer items such as food and hygiene products.
A market cycle has four distinct phases:
1. Phase of accumulation: The accumulation occurs immediately after the market has reached its bottom. When value investors, money managers, and knowledgeable traders believe the worst is over, they begin buying stocks, and valuations become extremely important. During this time, the market sentiment shifts from negative to neutral. The market, however, remains bearish.
2. The mark-up stage: During the markup stage, investors start to pour in large numbers, resulting in a significant increase in market volume. Valuations begin to rise above historical norms, but underemployment and layoffs continue to rise. At the mark-up phase, market sentiment shifts from neutral to bullish and, in some cases, euphoric. There is a selling climax, which is a final parabolic price rise due to participation.
There is a selling climax, which is a final parabolic price rise caused by the involvement of fence-sitters and reluctant or risk-averse investors.
3. Phase of distribution: The distribution phase of the market cycle is the third stage in which brokers start to sell securities. Market sentiment shifts from bullish to mixed. It is the point at which the market keeps changing. The transition is progressive and may take some time. Prices tend to remain relatively stable over several months. It may, however, accelerate as a result of a sudden negative geopolitical shift or poor economic news, such as global epidemic lockdowns.
4. Mark-down period: The mark-down phase is the last stage of a market cycle and is disastrous for shareholders who still hold positions. Security prices fall far below what investors paid for them at the outset. As the final period, it also marks the start of another accumulation phase, in which new investors will purchase depreciated investments.
Conclusion
Given that there is no readily identifiable beginning or end point, determining which market cycle one is presently in is nearly impossible. A market cycle has no fixed duration, which means it can last anywhere from a few moments to a decade. It has the potential to halt economic and financial policy formulation.