Stock market cycle explained

Stock market cycles are proposed patterns that proponents argue may exist in stock markets. Many such cycles have been proposed, such as tying stock market changes to political leadership, or fluctuations in commodity prices. Some stock market designs are universally recognized (e.g., rotations between the dominance of value investing or growth stocks). However, many academics and professional investors are skeptical of any theory claiming to identify or predict stock market cycles precisely. Some sources argue identifying any such patterns as a "cycle" is a misnomer, because of their non-cyclical nature.^[1] Economists using efficient-market hypothesis say that asset prices reflect all available information meaning that it is impossible to systematically beat the market by taking advantage of such cycles.^[2]

Changes in stock returns are primarily determined by external factors such as the U.S. monetary policy, the economy, inflation, exchange rates, and socioeconomic conditions (e.g., the 2020-2021 coronavirus pandemic).^[3] Intellectual capital does not affect a company stock's current earnings. Intellectual capital contributes to a stock's return growth.^[4]

Economist Milton Friedman believed that for the most part, excluding very large supply shocks, business declines are more of a monetary phenomenon.^[5] Despite the often-applied term cycles, the fluctuations in business economic activity do not exhibit uniform or predictable periodicity.^[6]

According to standard theory, a decrease in price will result in less supply and more demand, while an increase in price will do the opposite. This works well for most assets but it often works in reverse for stocks due to the mistake many investors make of buying high in a state of euphoria and selling low in a state of fear or panic as a result of the herding instinct. In case an increase in price causes an increase in demand, or a decrease in price causes an increase in supply, this destroys the expected negative feedback loop and prices will be unstable.^[7] This can be seen in a bubble or crash.^[8]

Publications

• Conference Board - Consumer Confidence, Conference Board’s Present Situation Index - Major turns in the Conference Board’s Present Situation Index tend to precede corresponding turns in the unemployment rate—particularly at business cycle peaks (that is, going into recessions). Major upturns in the index also tend to foreshadow cyclical peaks in the unemployment rate, which often occur well after the end of a recession. Another useful feature of the index that can be gleaned from the charts is its ability to signal sustained downturns in payroll employment. Whenever the year-over-year change in this index has turned negative by more than 15 points, the economy has entered into a recession.^[9] The most useful methods to predict business cycle use methods similar to the organization as Eurostat, OECD and Conference Board.^[10]
• Federal Reserve Bank of Chicago - Chicago Fed National Activity Index (CFNAI) Diffusion Index - The Chicago Fed National Activity Index (CFNAI) Diffusion Index is a macroeconomic model of Business Cycle Models. [When passing through a value of -0.35, the] “CFNAI Diffusion Index signals the beginnings and ends of [[[National Bureau of Economic Research|NBER]] ] recessions on average one month earlier than the CFNAI-MA3.” … the crossing of a -0.35 threshold by the CFNAI Diffusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below)...,^{[11] [12] [13]}
• Federal Reserve Bank of Philadelphia - Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) - is published by the Federal Reserve Bank of Philadelphia. The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions.^{[14] [15]}
• Federal Reserve Bank of New York - Yield Curve - the slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions.,^[16]
• BofA Merrill Lynch - Global Wave - has indicators from around the world such as industrial confidence, consumer confidence, estimate revisions, producer prices, capacity utilization, earnings revisions, and credit spreads. When the Global Wave troughs, THEN the MSCI All Country World equity index is up 14% on average over the next 12 months.^{[17] [18]}
• JP Morgan - Equities tend to do well in environments featuring rising growth rates as well as falling inflation. S&P 500 return = 9.80% - 6.44 x Max [0, -1.26% - annual change of the GDP growth rate in %]. R² = 22.4%.^[19]

See also

• Technical analysis
• Market timing
• Bottom (technical analysis)
• Market trends and Trend following
• Histoire des bourses de valeurs (French)

External links

• Web site: Civilian Employment-Population Ratio. U.S. Bureau of Labor Statistics. 1 January 1948. FRED, Federal Reserve Bank of St. Louis. 16 December 2018.
• Web site: Wells Fargo Advisors. www.wellsfargoadvisors.com. 16 December 2018.
• Secular Mean Reversion and Long-Run Predictability of the Stock Market. Valeriy. Zakamulin. 18 December 2015. 2209048.

Notes and References

1. Mankiw . Gregory . 1989 . Real Business Cycles: A New Keynesian Perspective . The Journal of Economic Perspectives . 3 . 3 . 79–90 . 0895-3309 . 1942761 . 10.1257/jep.3.3.79. free .
2. copied content from Efficient-market hypothesis; see that page's history for attribution
3. https://www.cnbc.com/2020/11/03/stock-futures-open-flat-after-tuesdays-rally-as-traders-await-us-election-results.html
4. copied from Wikipedia article Intellectual capital The Impact of Intellectual Capital on a Firm’s Stock Return | Evidence from Indonesia | Ari Barkah Djamil, Dominique Razafindrambinina, Caroline Tandeans | Journal of Business Studies Quarterly 2013, Volume 5, Number 2
5. Book: Schwartz, Anna J.. Money in Historical Perspective. 1987 . University of Chicago Press. 978-0226742281 . 24–77 .
6. copied content from Business Cycle; see that page's history for attribution
7. Book: Wilcox . Jarrod W. . Fabozzi . Frank J. . Financial Advice and Investment Decisions: A Manifesto for Change . . November 20, 2013. 9781118415320 .
8. copied content from Market trend; see that page's history for attribution
9. http://libertystreeteconomics.newyorkfed.org/2013/09/consumer-confidence-a-useful-indicator-of-the-labor-market.html Federal Reserve Bank of New York, Consumer Confidence: A Useful Indicator of . . . the Labor Market?
10. Web site: MONITORING AND PREDICTION OF BUSINESS CYCLE . PDF. Andrea Tkáčová. Barbora Gontkovičová. Emília Duľová Spišáková. Researchgate.net.
11. Web site: A different way to review the Chicago Fed National Activity Index. Chicagofed.org. 16 December 2018.
12. Web site: Background on the Chicago Fed National Activity Index. Chicagofed.org. 16 December 2018.
13. Web site: Chicago Fed National Activity Index: Diffusion Index. Federal Reserve Bank of Chicago. 1 May 1967. FRED, Federal Reserve Bank of St. Louis. 16 December 2018.
14. Web site: Aruoba-Diebold-Scotti Business Conditions Index - weekly macroeconomic activity - Philadelphia Fed . 2013-09-29 . https://web.archive.org/web/20131017063849/http://www.philadelphiafed.org/research%2Dand%2Ddata/real%2Dtime%2Dcenter/business%2Dconditions%2Dindex/ . 2013-10-17 . dead .
15. Web site: Aruoba-Diebold-Scotti Business Conditions Index (12/08/2017 - 12/08/2018). Philadelphiafed.org. 16 December 2018.
16. 10.1162/003465398557320. Predicting U.S. Recessions: Financial Variables as Leading Indicators. 1998. Estrella. Arturo. Mishkin. Frederic S.. Review of Economics and Statistics. 80. 45–61. 11641969.
17. Bank of America, Merrilly Lynch, RIC-Themes and Charts | 21 February 2017, page 12
18. Web site: BofA: The Economic 'Global Wave' Just Turned Positive And That's Extremely Bullish For Stocks. Sam. Ro. Business Insider. 16 December 2018.
19. Web site: Abdullah Sheikh, Director of Research, Strategic Investment Advisory Group (SIAG). Regime change: Implications of macroeconomic shifts on asset class and portfolio performance . 2011. Jpmorgan.com.