What are market cycles and how can you time one?

We look at market cycles – what they are, how they can help investors make decisions, and then examine how Brexit and a possible Corbyn government could affect the UK economic cycle.

What is a market cycle?

A market cycle is a pattern that aims to indicate when new trends in an economy, market or industry have developed. Markets move in cycles along with growth and contraction in the underlying economy. Usually these periods begin with slow growth, which then accelerates and reaches a peak, and is then followed by a sustained bout of economic weakness.

Investors experience these cycles through the medium of markets, which rise and fall as economic growth ebbs and flows. When the economy grows, consumers and businesses spend more, boosting revenues and profits, and then as growth weakens and then contracts, those same consumers and business slow their spending and perhaps stop altogether in some areas.

Rising earnings tend to boost share prices, while the reverse is usually true. Hence the saying, ‘in the long run, the stock market is the economy’.

What are the stages of market cycles?

There are four stages to a market cycle. In the first, accumulation, stage, the economy and market has bottomed out, and brave investors step in to find discounts and cheap valuations. The second stage is the mark-up phase, when confidence has returned and more investors are prepared to put their cash to work. Some early investors may cash out in order to find new bargains. Phase here sees distribution, as prices become more choppy and begin to edge lower, with more investors beginning to cut back on their positions. Finally, phase four sees the mark-down stage, when the last investors exit and prices fall substantially. Some of the early adopters from phase one begin to think about investing once again.

Timing market cycles

Like all investing and trading, timing a market cycle can be difficult, to say the least. The old saying, ‘no one rings a bell at the top’, still holds true, but applies to the other phases as well. No one fires a starting gun on phase one, or signals that we have moved firmly from one to another.

As with most investing, it is always easy to see when cycles began and ended with the benefit of hindsight. Then it is simple to see when each stage began and ended, as well as seeing the entire long-term cycle. But at the time it is all but impossible. Sometimes a long-term uptrend can endure a period of weakness before pushing on higher, or it could be the beginning of a turn lower. And cycles are not the same length, while the gains and losses in the overall cycle are not evenly-distributed across all four periods.

UK market cycles: driven by the price of land

Akhil Patel, of Southbank Investment Research, says that the UK economy is driven by one important variable, the price of land.

He argues that the property cycle, of rises and falls in valuation, repeats itself with a high degree of accuracy, but that most investors fail to follow the cycle accurately, if indeed they know that it exists at all. But if an investor can accurately determine the current stage of the four cycles, then they can more effectively allocate capital, and exit the market before a bigger sell-off takes place.

In the current market cycle, it appears that Brexit is not having a big impact, even if it dominates news and economic data. Interestingly, even a possible Jeremy Corbyn government, which could see significant redistribution of land and other assets, would not seriously change the underlying cycle. Indeed, a Corbyn government could be followed by a boom in property or land prices, as the successor government unwinds the policies of the previous administration.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Trading around Brexit

Find out how the UK’s exit from the EU continues to affect traders, and discover:

  • The unique opportunities in a ‘hard’ and ‘soft’ Brexit
  • The markets you should be watching
  • Everything that’s happened so far

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
liveprices.javascriptrequired
liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.