Market Cycle

There are probably four distinct phases in a Stock Market Cycle. Going from Trough to Peak and back to the Trough after a 20% plus Drawdown.

To describe a Stock Market Cycle, it is somewhat arbitrary as it depends on an individual’s criteria for the different phases and where to define where a New Cycle begins. OK, so one place to start is at the bottom of the cycle. Following a Market Drawdown of 20% or more, the Stock Market is characterised by excessive pessimism and it is during this stage that a new cycle begins. A new pattern in the Stock Market starts to form. The Stock Indexes start to increase and early cycle sectors start to outperform and patterns start to emerge in the different sectors. Valuations start to increase as Multiple Expansion occurs in the key Ratios such as the PE Ratio and Price to Sales. Then suddenly the Peak is reached, often one knows this at the time as Stocks battle to reach new highs.

During the various stages in a Stock Market Cycle, different stocks and sectors outperform because their businesses are benefitting from the current Macro environment. The Stock Market Cycle eventually reaches a peak, due to broad enthusiasm justified or unjustified. Then the Stock Market starts a period of uncertainty increasing volatility and could enter a period of market decline. As the Market enters into a Drawdown, the speed and the overwhelming force of the Stock Market does not discriminate. Most Stocks experience declines and the overall Market experiences a drawdown of 20% or more. Then the Trough and the Market enters a new phase of bottoming out. Back to the beginning.