Ride The Business Cycle

In the world of investing, understanding a business cycle is like riding the waves of economic trends. As legendary investor Howard Marks puts it, “Recognising what’s going on around you is essential to achieve investment success”, which highlights the importance of adaptability in responding to the ever-changing economic landscape.

Let’s consider how the economy goes through different stages and how it affects various businesses and sectors. There are four main stages in this cycle: expansion, peak, recession and recovery.

The Four Phases

During the expansion phase, various facets of the economy experience growth. Confidence among consumers and businesses strengthens, leading to higher capacity utilisation in factories. During this phase, employees generally benefit from multiple job opportunities and salary increments, while consumers indulge in discretionary spending and vacation planning. As this cycle progresses, the economy will reach its peak level. This phase is marked by rapid price increases across goods and services. To counter this, central banks will tighten monetary and fiscal measures.

This is followed by the recession phase. The recession phase introduces a cautious atmosphere as both consumers and businesses adopt a conservative approach towards spending. Factories operate below capacity, cost-cutting measures are implemented, and layoffs become prevalent, contributing to reduced consumer spending and economic activity. This phase marks a significant downturn across sectors, characterised by a notable decline in GDP, employment rates, and consumer spending.