The Business Cycle and Stocks
Economies move through expansions and recessions. Stocks tend to fall before recessions start and bottom before they end. Here is how the cycle works, with real examples from 2008 and 2020.
Four phases
The business cycle has four broad phases: expansion, when jobs and output grow; a peak; contraction, or recession, when activity shrinks; and a trough, followed by recovery. U.S. recessions are officially dated after the fact by a committee of economists, often many months later.
The economy moves through expansions and contractions.
Stocks look ahead
Stock prices reflect expected future profits, so markets usually move before the economy does. In the 2007–09 recession, which officially ran from December 2007 to June 2009, the S&P 500 fund SPY peaked in October 2007 and bottomed on March 9, 2009, about three months before the recession ended. In our price data, it fell about 56% from peak to low.
A real chart: S&P 500 ETF (SPY) weekly bars, 2007 to 2010. Past performance does not predict future results.
2020: fast down, fast up
The 2020 recession lasted just two months, February to April. SPY fell about 34% from Feb. 19 to March 23, 2020, in our price data, then began recovering while unemployment was still soaring. Waiting for good economic news would have meant missing much of the rebound.
What it means for you
- Bad economic news often arrives after stocks have already fallen.
- Market bottoms usually come when the news still looks terrible.
- Recessions are hard to predict in real time, even for professionals.
- A long-term plan beats trying to time each phase.
Key takeaways
- The cycle runs through expansion, peak, contraction and trough.
- Stocks usually move before the economy.
- SPY bottomed in March 2009, months before the recession ended.
- Waiting for good news can mean missing rebounds.