Market Cycle

Updated on January 30, 2024
Article byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Market Cycle? 

A market cycle is an up-and-down oscillation or recurring phase of market growth and decline. The cycle depicts trends and patterns formed due to different economic conditions or the general business environment. Upward trends usually indicate growth, and a downward trend indicates a decline.

market cycle

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Businesses, investors, economists, and other interested parties study the cycles to predict trends and notice recurring situations. Analyzing current and historical trends helps them make important decisions and steps. For example, investors can time their trade; the same is true for businesses. Economists may use it to frame policies or to study the markets further.

Key Takeaways

  • Market cycles are the periodic rise and fall of trends and growth and decline patterns. It is natural and works on the theory, ‘What goes up must come down.’
  • The cycle has four stages: accumulation, mark-up, distribution, and mark-down.
  • Businesses, investors, economists, and other interested parties study the cycles to predict trends and notice recurring situations. The analysis of current and historical trends helps them make important decisions.
  • Analyzing and understanding the cycles is crucial for traders worldwide since it enables them to maximize their earnings while trading equities, commodities, cryptocurrencies, and currency markets.

Market Cycle Explained 

Market cycles are the periodic rise and fall of trends and growth and decline patterns. It is natural and works on the theory, “What goes up must come down.” The natural cycles in the markets can be attributed to several factors. The most important of these are macroeconomic variables like inflation, interest rates, rates of economic growth, and unemployment rates.

Macroeconomic variables’ movements and directions predict whether the economy is expanding or contracting. For example, falling interest rates are seen as a sign of economic expansion; at the same time, a rise in inflation is generally a sign of approaching interest rate increases, which will cause the market to constrict and slow the pace of economic expansion. High unemployment rates also signal an imminent economic downturn, while declining unemployment tells investors that growth is around the corner.

The direction of market cycles is significantly influenced by market sentiments as well. A boom period, during which investors rush to buy particular assets, as well as periods during which the market is seized by panic and investors sell in large numbers, may occur due to several circumstances.

Analyzing the market cycles and understanding them is crucial for traders worldwide since it enables them to maximize their earnings while trading in equities, commodities, cryptocurrencies, and currencies. It is especially true for derivatives traders who seek to profit from both positive and negative price moves, which are typical of market cycles.

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Stages 

Market Cycle Stages

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  • Phase 1: Accumulation phase: The point at which markets resume trading after a long period of pessimism; after it has reached rock bottom, value investors typically enter the market at this point. The valuations here are attractive; however, market sentiment will remain bearish.
  • Phase 2: Mark-up phase: The markets are stable and gradually show highs. The market shows higher highs and higher lows as an indication of positivity. Here, fear subsides, and investors jump in line to ride the high tide. This situation is where they usually categorize it as a bull market.
  • Phase 3: Distribution phase: It is a stage of optimism. Sellers dominate and arrest the upward momentum of the markets. As a result, prices are usually seen to move narrowly sideways, and investors usually cash out on profits.
  • Phase 4: Mark-down phase: The final phase of the market’s cycle. The big investors leave the market with excess supply after cashing out profits. As a result, the prices plunge, and the overall sentiment is seen as bearish. Fear and hope dominate this phase. Mastering the cycle is difficult; however, those who are wise and have saved money can purchase assets at low prices. The cycle, after this stage, starts again. Furthermore, attempts to master the cycle may backfire at any moment. Patience and intelligent investing by focusing on one’s goal will only make investors sail through cycles.

Chart 

market cycle chart

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A market cycle chart is a visual representation of market patterns over a predetermined time frame. The axes show price (or other desired variables) and time movements. The time frame can change by a few weeks, months, or even years; market data determine how the charts move, and interested parties come to a conclusion through the depicted models.

Market Cycle vs Economic Cycle 

Let us look at the differences between the market and economic cycle:

PointsEconomic cyclesMarket cycles
MeaningIt is a depiction of the economy’s overall condition as it cyclically progresses through different stages.It is a depiction of trends in the market.
StagesThe cycle has four phases: peak, expansion, contraction, and trough.The cycle has four stages: accumulation, mark-up, distribution, and mark-down.
DeterminantsThe stage of the economic cycle can be determined by variables like gross domestic product (GDP), interest rates, total employment, consumer spending, etc.It is generally a reflection of economic cycles. So, for example, when economic activity is down, people won’t have money to spend, and certain market sectors (e.g., the housing market sector) will witness poor performance.
 
ScopeThe economic cycle determines a whole nation’s trend. Market cycles are part of economic cycles. A market cycle may indicate the market of a thing or a particular field, such as the real estate market cycle, stock market cycle, etc.

Frequently Asked Questions (FAQs)

How many years is a market cycle?

The period portraying a market cycle is not a fixed number. Instead, specific variables and events in the market influence the duration of the market cycle. Generally, the period can range from months to years.

How long is a stock market cycle?

Cycles in the stock market generally portray periodic anticipated or observed patterns. They are comparable to market cycles but are only relevant to equities and trading. Stock market cycles may be of a few days or extend to several years; these changes may be due to various factors.

What causes market cycles?

There exist several factors which cause natural or calculated cycles in the market. For example, government policies, economic growth rate, unemployment, and interest rate fluctuations influence market activities and cause rise and fall. Furthermore, these factors are interdependent, adding to the complication in forecasting the cycles.

This has been a guide to what is Market Cycle. We explain it in detail with its chart, stages, and comparison with the economic cycle. You can learn more about finance from the following articles –

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