Understanding Economic Cycles (Business Cycles)
Definition from Wikipedia.org.:The business cycle or economic cycle returns to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product. Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable period pattern.
The economic clock is a simplified approach to understanding our position as to the health of the ecomony. It also assists to identify the best performing market sectors in elation to the growth area of the economic cycle. Keep in mind that the there any number of random effects that effect the economy such as wars, natural disasters and the like that sway the cycle and effect the transition. It wiil never be a perfect cycle and should only be used as evidence to assist with investment decisions.
The above example is very simplified version of economic expansion and contraction. The Economic Cycle Research Institute or ECRI http://www.businesscycle.com earn a living from analyzing the economy and providing detailed information on the health of the economy by way of specialized indicators from various economic sources. These indicators are compliant and the result is some of the best leading index indicators for picking turning points in the economy. One indicator we follow is the Weekly Leading Index or WLI.
It is worth visiting the website http://www.businesscycle.com/about/approach/ to get a better understanding or read the book
Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy, by Lakshman Achuthan and Anirvan Banerji, New York: Currency Doubleday, 2004.
In Martin J. Pring's book, The Investors Guide to Active Asset Allocation, 2006. He described the business cycles in six stages, where:
o Stage 1 – only Bonds are bullish;
o Stage 2 – Only commodities are bearish;
o Stage 3 – Everything is bullish;
o Stage 4 – Bonds begin a bear market but stocks and commodities remain bullish,
o Stage 5 – only commodities are bullish) and Stage 6 – Nothing is Polish
Martin is a well-respected market analyst and commentator and in his book he clearly describes the intermarket relationships between the major markets and how they are intrinsically tied with each other. The flow on effects of each cycle then affects the corresponding business sectors expanding or contracting business in each of these sectors.