If economic growth was measured like running, the U.S. economy has been sprinting through an ultramarathon. July 2019 marked the longest economic expansion in history—some 121 months of growth—beginning in June 2009. The National Bureau of Economic Research reported that this broke the previous record of 120 months from March 1991 to March 2001.
Despite this enviable period of growth, where production of goods and services has been on the rise, economies typically have periodic ups and downs. These fluctuations, called an economy’s “business cycle,” follow patterns. The full business cycle has six phases, each with distinct characteristics:

1. Expansion

During this economic honeymoon, demand for goods and services is high, economic output is increasing, and the outlook is bright. Financial-page headlines typically report low unemployment numbers, rising wages, and low default rates in lending. Consumers, feeling confident about their jobs and prospects, spend more, and businesses tend to make investments for the future, keeping the cycle going.

As companies enjoy higher revenues and profits during expansion, and investors seek growth investments, equity prices often rise, although this might not happen uniformly across sectors.

2. Peak

At some point, the spending slows, and the economy reaches a point at which it cannot expand further. This point is called the “peak.” Signs of growth stall, prices typically stop increasing, and the market becomes volatile. During this phase of the business cycle, investors may favor a value approach to equity investing or look for more conservative investments such as actively managed bond funds, which may offer less exposure to market fluctuations.

3. Recession

Once economic growth has hit its peak and begins to fall, an economy is in recession. These contractions differ in their severity, but may lead to investment volatility, increased unemployment, and business losses. Markets may have an excess supply of goods if production levels have not been adjusted soon enough for declining demand. During recessions, equity prices often drop, leading to disconcerting volatility. These drops may lead to buying opportunities for investors, as solid company stocks may be purchased at relatively low prices.

4. Depression

An extended recession can become a depression, in which the economic downturn worsens. Depressions are typically marked by high unemployment and job losses, low production levels, and income reduction. Businesses and consumers may have difficulty securing credit. Stock market performance may be alarming during a depression. Investors can avoid panic selling by focusing on their long-term investment strategy and holding on to assets that have the opportunity to appreciate.

5. Trough

Even significant economic downturns don’t last forever. The trough represents the time when the economic downturn has hit its lowest point and begins to curve up again. Stock prices may rebound, while bond prices may hold steady, as investors seek opportunities that may have less risk.

6. Recovery

Once demand begins to grow, companies gain confidence and begin hiring again. As people get back to work, consumer and business confidence rises. Banks may loosen credit restrictions and begin investing in growth again. Recovery eventually turns into expansion, and a new business cycle begins.

As the recovery gains more traction, equity prices usually rise, too, so investors feel more confident investing in the stock market. They may even have an increasing appetite for growth and look for investments that offer greater returns.

Of course, economic cycles don’t run like clockwork, and it’s difficult to predict their timing or impact. They are affected by external factors, as well. Monetary and trade policy, geopolitical factors, and even fallout from climate change can have an impact on the business cycle—or appear to. In this latest expansion, volatility has become more pronounced and more than one pundit has predicted a recession that has not yet happened.

Investors rarely, if ever, gain from knee-jerk reactions to changes in the business cycle. While being aware of the economic environment is smart, trying to time the market generally isn’t. Most financial experts recommend focusing on long-term financial goals and utilizing an automatic investment plan to stay committed to your investment, regardless of where the market may be in the cycle.

Start an automatic investment today

Sources:
https://www.cnbc.com/2019/07/02/this-is-now-the-longest-us-economic-expansion-in-history.html
https://www.investopedia.com/terms/d/depression.asp
https://corporatefinanceinstitute.com/resources/knowledge/economics/business-cycle