Definition
The economic cycle (business cycle) describes the fluctuation of economic activity between expansion and contraction phases. The four stages are: expansion (growing GDP, falling unemployment, rising profits), peak (economy operating at maximum capacity, potential overheating), contraction (declining GDP, rising unemployment, falling profits), and trough (economy at weakest point before recovery). Understanding cycle position helps with sector rotation and asset allocation. Cycles typically last 4-10 years, though no two cycles are identical.
Example
Early-cycle favors cyclicals (consumer discretionary, financials), mid-cycle favors industrials and materials, late-cycle favors energy and defensive sectors, and recession favors utilities, healthcare, and consumer staples.
FAQ
What is Economic Cycle?
The natural fluctuation between periods of economic expansion and contraction.
Why is Economic Cycle important?
Economic Cycle helps investors evaluate macroeconomic and make more informed decisions.