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. Much of the economic data and corporate earnings are solid but throw Ukraine and China into the equation and the near future appears cloudy.

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.

So here we go:

Every cycle is unique.

Every cycle is unique because each segment unfolds at a different rate. Whether you look at economic cycles, market cycles or any other related financial cycles, history shows that no two ever look exactly alike. Nor are there any set parameters for 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. Completely distinct factors were peaking, collapsing, and recovering, and the market was responding to distinctive conditions.

Yet, every cycle is the same.

While we can’t predict exactly what comes next or how long the current market downdraft will last, we know that each cycle has a beginning, a middle and an end, and what happens during each segment is consistent over time.

  • In the beginning, economic activity is uncertain, people and businesses are cautious, and asset values are low.
  • During the middle, confidence improves, spending increases, and asset values rise.
  • Toward the end of a cycle, consumer demand is strong, corporate profit margins peak and asset values extend as investors embrace more risk.

History also shows that human emotions are a consistent driver influencing each cycle. People don’t follow technical markers – but they do create observable patterns that are foundational to how we look at market trends. We find valuable clues in the data related to job creation, consumer sentiment, company earnings growth, and valuation metrics like price-to-earnings ratios. Patterns develop 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.

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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