The stock market can sometimes seem like a volatile place where you can never know what to expect next. In certain cases this can be true (for example the financial crisis in 2008). However, in general, the stock market has reliable cycles that can help you understand when and where to invest your money.
When you’re investing, it’s important to understand what type of market you’re in and what the overall investment climate is like. Having a firm understanding of this will allow you to protect your money and maximize your total return. Let’s take a look at what some of the most common cycles are that you can expect from the stock market.
Two Types Of Markets
There are really just two types of markets that you can expect from the stock market. A bull market and a bear market.
Bull Market – A bull market is the one you want. This means that the prices of stocks in the stock market are rising. There is no set amount of time that a bull market lasts but it can be anywhere from a few months to even years.
Bear Market – Bear markets aren’t quite as fun and are the opposite of bull markets. Overall, prices of stocks are falling which encourages people to sell. When more people are encouraged to sell it drives prices of stocks down even more. This can be a dangerous self-fueling system and can even trigger a recession.
A good way to remember the difference between the two is that people like to ride bulls. Bull riding has been around forever and similar to a bull rider, investors want to ride the bull market’s rise. On the other hand, nobody has ever wanted to ride a bear.
Other Investment Cycles To Expect
Bull and bear markets are used to describe markets over long periods of time. However, there are also smaller phases that you can watch out for in hopes of predicting what will happen next. These take place during transitional periods (from a bull market to bear market or vice versa).
- Accumulation Phase: Accumulation occurs after the market has bottomed and the innovators and early adopters begin to buy, figuring the worst is over. You can see this on the graph below of the S&P 500. Accumulation phases occurred in late 2002 and early 2009 after significant recessions.
- Markup Phase: This occurs when the market has been stable for a while and moves higher in price.
- Distribution Phase: Sellers begin to dominate as the stock reaches its peak. Once the majority of investors begin to sell, a downtrend will occur.
- Downtrend: Downtrend occurs when the stock price is tumbling down. This marks the beginning of a bear market.
The above graph is spread out over a very long time frame so it is easier to see longterm trends of the market. The ideal time to have started investing in the stock market would have been in the early 90s, mid-2000s, or right before 2010. Getting in at these times would have been a perfect example of “buying low”.
Of course, this is easier said than done and hindsight is 20/20. It can be much more difficult to predict where the stock market will head when you’re living in the moment. One of the best ways to try and predict the market is to analyze what’s going on in the economy.
The Economy Drives The Market
At it’s simplest, the stock market just reflects what’s going on in the economy and what’s going on in the economy is driven by consumers. If lots of people are buying products, receiving raises, starting businesses, etc. then it will most likely lead to increased earning reports for companies. If companies are showing an increase in earnings, it will lead to high pricing valuations.
If you want to predict what will happen with the stock market, you’ll need to monitor the economy. This is what Ray Dalio of Bridgewater Associates did and it led to the creation of the 5th most important company in the world.
There are obviously a lot of factors that compose the economy but some simple things you can look for are:
- Overall do businesses seem to be doing well? Are companies opening new stores or are they shutting them? Have you noticed lots of companies filing for bankruptcy?
- Pay attention to what your peers are doing (they’re affecting the economy!). Do people seem to be spending more, less, or the same as last year? Do you notice a lot of people buying new houses or cars?
- What have the government’s most recent policies been and how do you think they will affect businesses?
Of course, this can seem a little bit like you’re trying to predict the future. There is no exact science behind it. The idea is just to think about what is going on in the economy today and how that will have impacted companies in the future.
Remember, the most important part of investing is taking action. You can perform the most detailed and well-researched analysis in the world but if you don’t take action then it’s useless. Make your decision, take action, and stand by it!
We hope that you found this article valuable and have a little better of an understanding when it comes to what cycles you can expect from the stock market. If you’re interested in hearing more articles similar to this, please subscribe below!