Business Cycle

The business cycle is the repeating movement of an economy through expansion, a peak, contraction, a trough, and recovery. Growth does not travel in a straight line but advances in waves.

Each phase looks different. In expansion, employment and spending rise and corporate profits improve, but overheating brings inflation and central bank rate hikes. In contraction, spending and investment fall and unemployment rises, prompting rate cuts to get money moving again. Rates and the cycle chase one another.

Industries feel it unevenly. Spending you can postpone, such as cars, travel, and luxury goods, swings hard with the cycle and is called cyclical. Things people buy regardless, such as electricity, telecoms, and household staples, move less and are called defensive. A sense of where you are in the cycle therefore helps with allocation.

One caution: you only know where you were with certainty after the fact, and stock markets typically move several months ahead of the real economy. By the time headlines confirm a recession, prices have often already passed their low. So rather than trying to call the cycle, it is more practical to hold assets that survive any phase and keep investing by a fixed rule.