INVESTMENT CYCLES

Page Summary: Exploiting repetitive patterns of behaviour over various time spans

Comment
Those who don't learn the lessons of history, have to repeat them.

The classic four year stock market cycle

Investors RouteMap is heavily influenced by the concept that humans often behave in a repetitive cyclical manner. Investors RouteMap analyses three principal types of market cycles: -

Seasonal – Whether as a result of fluctuations in economic activity, the relationship between daylight hours and optimism or simply the annual financial reporting calendar, markets often display meaningful seasonal patterns. The chart type, Seasonal Trader provides a means for short-term traders to exploit this. Subscribers can also see Summary Tables, showing the best month to invest in the market or sell in each country and region.
Economics & Politics – The great majority of countries are controlled by political systems with immutable four-year cycles. This includes the world's three largest economic systems, which directly affect more than half of the world's GDP and two-thirds of stock market capitalisation. Key political elections and other events in each market's financial history are among the items shown in Chronology charts. The statistics for each country are shown in the Country Profiles. Switching between asset classes and investment styles can significantly enhance returns over these cycles, as described below.
Generation – The identification of very long run fifty-year cycles of inflation and disinflation in the leading western economies strongly suggests that certain economic phenomena reccur once every two generations. This may well influence the development of bubbles in bond, forex or stock markets. The 25 year timescale of the long-term charts shows these clearly and the chart on our home page provides a classic example.

While the players in curremcy, bond or stock markets may learn from past experience to anticipate cycles, the underlying factors causing each of these three cycles patterns nevertheless remain. For seasonal analysis the learning effect, if any, is shown by comparing long and short-term series in the Seasonal Trader charts. For longer investment cycles, any learning effects that may develop can be monitored in the changing amplitude of past patterns in the long-term versions of the Momentum charts.

Buy the green zones
Sell the red zones

Note to Subscribers
See our Best Guess by selecting Global View charts and tables in Shares RouteMap and Regional View in Styles RouteMap.

In theory, but not always in practice, there is a logical rotation between different types of investments in the course of an economic cycle, as shown schematically in the table below.

	Year 1	Year 2	Year 3	Year 4
Background Developments
Economic Growth	Low	Rising	High	Falling
Capacity Utilisation	Falling	Low	Rising	High
Inflation	High	Falling	Low	Rising
Stock Market	EPS Down	PE Up	EPS Up	PE Down
Asset Class & Style
Long Term. Bonds	Buy	Hold	Sell	Avoid
Growth Shares	Buy	Hold	Sell	Avoid
Value Shares	Avoid	Buy	Hold	Sell
Smaller Companies	Avoid	Buy	Hold	Sell
Technology	Sell	Avoid	Buy	Hold
Resources	Hold	Sell	Avoid	Buy
Gold	Hold	Sell	Avoid	Buy
Cash	Hold	Sell	Avoid	Buy

Reading down the columns each stage represents the successive years after each Presidential election, assuming perfect correlation between the economic and US political cycles. However each stage does not necessarily represent a 12 month period. Reading across the rows, text indicates the character of each stage, while colour coding indicates whether it is generally better to buy or sell, in the upper block as regards the stock market as a whole and in the lower block as regards asset classes and investment styles at each stage, ranked in order of cyclical precedence.

It should be emphasises that reality is far more complex than this simplified model, in that the timing of cycles varies from region to region, expectations based on consensus economic forecasts can be proved wrong, and that there are occasions where generational bull markets completely over-ride the economic cycle. This has happened most spectacularly in the Seventies for Gold and Resource, in the Eighties for Japan and in the Nineties for Technology, which would normally behave as late-cyclical capital goods shares.

Next Class

Top-down Investing Strategies is part of the free international investment seminar. Just follow the classroom signs alongside. At the end of each class, there is a sign to the beginning of the Next Class. You can join the classes at any stage, but logically, it is best to start at the top of this page which is the beginning of the series. If our use of English is not plain enough, you can check out key words and concepts in Alphabet Soup and Jargon.