This is the cycle that most people mean when they talk about economic cycles. It represents the ups and downs of the economy. The downs are the recessionary phases. What exactly is a recession? A simple definition that is used often times refers to a period when GDP falls for at least two quarters.

In the picture below, the recessions are market in red. There have been 15 recessions since 1900. This means that the duration of an entire cycle is about 6.8 years. Most books and newspapers let you believe that the recession cycle is the key driver of stock markets. If we look at the picture below, we realize that most recessions are relatively short anecdotes – apart from the great depression starting in 1929.

As an investor, it is important to understand where in the economic cycle the markets are. In the beginning of a recession, stocks tend to lose quite some value. This holds especially for cyclical stocks like capital equipment producers. You can clearly see the short-term bumps of stock prices in the chart below. We have developed our own indicators that have done a very good job for us to show where in the cycle we are. A lot of macro indicators that many analysts look at (unemployment rates…) give warning signals for recessions far too late.

We will write a separate article on the economic cycle. We will give some perspective on how it works and will show some of our favorite leading indicators.