Making sense of market cycles in chaotic times

Reading the financial news these days is anything but comforting. Interest rates are rising. Recession talk is increasing. Employment rates are high but whispers of layoffs are growing louder. Economic data and corporate earrings may point to a healthy business cycle, but throw Ukraine, oil prices and China into the equation and it’s anyone’s guess.

Amid the uncertainty and conflicting narratives, we think it’s a good time to talk about how market cycles interact with investments and our portfolio management decisions, in hopes of simplifying, clarifying, and helping you sleep better tonight.

So here we go:

There are stock market cycles and economic cycles.

Though they’re related and the media often conflates the two, they’re not the same. We can be in an appealing economy but a not-appealing stock market and vice versa. It’s useful to separate the two cycles to consider how they interact with investments. Market cycles are typically measured in stock prices. Stock prices often go in the same direction as the economy, but not always. Stock prices can go up in a recession, and they can go down when the economy is growing.

Every cycle is unique.

From a business cycle perspective, we’re either in a late-cycle slowdown or we’re approaching a contraction in economic activity. But whether you are looking at economic cycles or market cycles, or any other related financial cycles, no two cycles will ever look exactly alike across history. Nor are there any set parameters for how long a cycle will last or how far it will go to the upside or the downside. The main drivers behind each cycle vary, as do the dynamics that bring it to a halt. Consider how different the dot-com bubble burst of 2001-2003 was compared to the financial crisis of 2008-2009. Completely different factors were peaking, collapsing, and recovering, and the economy was responding to distinctive conditions.

Then there’s the people factor.

When people feel worried about their employment, they spend less money. When market sentiment turns sour, they exit markets all at once, driving investment values down. People are the key reason we never expect cycles to look exactly alike or follow precise trendlines. Humans do not follow technical markers, but they create observable patterns that are foundational to how we look at market trends.

Yet, we can see patterns in the cycles and gain context from clues in data.

Job creation, consumer sentiment, company earnings growth, valuation metrics like price-to-earnings all show patterns across cycles that are reliable, if not perfectly matched or easily predicted. And we can gather valuable context about the economy, the market, and specific investments by tracking key metrics and keeping a general sense of where we stand in the cyclical patterns. These clues can help us decide whether it’s wiser to buy an investment today or wait for a more opportune moment as they help us assess how specific companies are positioned for what could lie ahead.

All of which guides our decision-making.

We pick our stocks individually, company by company, based on their ability to endure prolonged economic uncertainty and volatility. This is why our clients don’t need to worry about whether the market is at the bottom or the top. And it’s how we turn capital into confidence, and short-term volatility into long-term opportunity.

Of course, there are many intricacies to investing and each consideration has many tangents – many of which we will cover in future blog posts. So, stay tuned.

In the meantime, if you have any questions or concerns, reach out to us. We welcome the opportunity to continue the conversation.

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