"Business Cycles and Stock Markets: Navigating Economic Phases for Informed Investments"

Translation: This text delves into the pioneering analysis of the "Measurement of Business Cycles," presented in 1946 by Art Burns and Wesley Mitchell, later to become the Chair of the Federal Reserve Board. The study, based on extensive monthly data, observed the recurring expansion and contraction phases in economic activities. These cycles, initiated by corporate activities, differ from the cycles experienced by agrarian societies due to weather and other natural factors or the behavior of planned economies in socialist countries. The alternating nature of expansion and contraction cycles has been consistently observed.

These cycles can be classified as follows:

1. Recovery Phase: Occurs at the bottom of the economic cycle, with production at its minimum compared to potential output. Consumption and corporate investments are low, but there is a slight sense of improvement.

2. Expansion Phase: Characterized by increased production, growth rates surpassing normal levels, and consumer actively purchasing goods and services. Prices and interest rates begin to rise. Employers, facing shortages in labor and production facilities, increase employment and investments. As these resources become surplus, investments are scaled back.

3. Deceleration Phase: The rate of production growth decreases. Employers manage shortages through overtime and non-regular employment. Prices start to decrease.

4. Contraction Phase: Production decreases, consumer confidence and purchasing manager indices worsen. Companies cease overtime and non-regular employment.

Why Consider Business Cycles?

The understanding of business cycles is crucial because it reveals the opportune times to invest in stocks.

• Stock Market during the Recovery Phase:

  • Risky assets hit the bottom early, anticipating the end of the contraction phase. Stock market bottoms are known to occur three to six months earlier than the economic bottom. This is why stocks are considered to have foresight, as stock indices are seen as leading indicators of the economy by economists.

• Stock Market during the Expansion Phase:

  • Despite the seemingly strong market supported by a robust economy, high consumer confidence, high profits, and increased credit, investing in stocks during this phase is not straightforward. This is due to challenges such as difficulties in hiring quality employees, upward pressure on wages, increased borrowing for expanding production facilities, and a rise in demand for capital leading to higher interest rates.

• Stock Market during the Deceleration Phase:

  • The rise in interest rates leads to a decline in the stock market. Businesses find it challenging to make profits, and margins are squeezed. Despite a strong economy, stock investments may not be profitable during this phase due to these reasons, leading to a shift towards low-risk assets like government bonds.

• Stock Market during the Contraction Phase:

  • Investors adopt defensive strategies by purchasing government bonds or utility stocks to minimize the decline in principal. Defensive stocks, such as those in the food, beverage, and healthcare sectors, become sought after.

In summary, understanding the business cycle aids in developing appropriate investment strategies for each market scenario.