The saying “Change is the only constant” applies to all areas of life… including finance. Markets rise and fall. Alarmist headlines come and go. Market cycles are natural fluctuations in both the economy and the stock market.
Stock market cycles are related to economic cycles as well as investor sentiment and company performances. As the economy goes through phases of expansion (growth) and contraction (decline) it can impact investor sentiment by way of alarming headlines. Media can make a mountain out of a molehill by treating a normal market cycle as if it was out of the ordinary.
While the duration of economic cycles may fluctuate, their recurrence is unavoidable.
- Expansion: During an expansion, the economy is growing, businesses are thriving, unemployment is low, and consumer spending is high.
- Peak: This is the highest point of the expansion before the economy starts to slow down.
- Contraction: This is a period of economic decline, characterized by decreased GDP, rising unemployment, and reduced consumer spending.
- Trough: This is the lowest point of the contraction, marking the end of the recession and the beginning of a new expansion.
Characteristics of a Pullback
A market pullback is a temporary decline in the prices of stocks, bonds, or other assets after a period of sustained growth. It is a normal part of market cycles and shouldn't be confused with a full-fledged market correction or bear market, which are more significant and prolonged declines. Pullbacks may not be a major concern for long-term investors with a diversified portfolio. They can often use the opportunity to buy more shares of quality companies at lower prices.
- Magnitude: A pullback typically ranges from 5% to 10% from recent highs.
- Duration: It is usually short-lived, lasting for a few days or weeks.
- Cause: Pullbacks can be triggered by various factors, such as profit-taking by investors, concerns about economic data, or geopolitical events.
- Significance: While pullbacks can be unsettling for investors, they are often viewed as healthy corrections in an otherwise bullish market.
Long-Term Outlook
While the market can have a choppy appearance with fluctuating pullbacks and growth, it still tends to have positive growth in the long-term. While there are no guarantees in investing, you can see the average annual S&P 500 return rates has been 10% for nearly a century despite some large dips in the Great Recession and the dot-com crash of the early 2000s.
Revisit Your Plan
Investors who are able to remain focused on a strategic plan for their finances rather than being hypersensitive to daily changes in the market tend to have a better ability to stay the course towards their goals.
As markets shift, our advisors maintain a disciplined process while monitoring our clients’ accounts. If you ever have a question, we’re here to offer guidance.
CONTACT US
Sources:
https://www.investopedia.com/terms/b/businesscycle.asp
https://www.investopedia.com/terms/e/economic-cycle.asp
https://www.nerdwallet.com/article/investing/average-stock-market-return