Introduction
Investing isn’t about just picking the right stocks; it’s about understanding how markets move. Markets don’t go up forever, nor do they stay down permanently. They move in cycles, and learning to read these market cycles can help investors make smarter, more confident decisions.
It is the natural rise and fall of markets over time. Factors like economic growth, interest rates, investor sentiment, and global events drive it. These cycles repeat, though not always in the same pattern or duration.
Recognising where we are in the cycle helps investors make better decisions on when to buy, hold, and reduce risk.
Phases of a Market Cycle
Every market cycle typically has four main phases:
- Accumulation Phase: Following a decrease, asset prices are cheap. Investors with experience will begin quietly accumulating undervalued assets.
- Mark-Up Phase: Confidence returns, and prices start to rise steadily as more investors begin to enter the market.
- Distribution Phase: Markets are at the peak. There is plenty of optimism, but investors with experience are starting to book some profits.
- Markdown Phase: Prices start to decline. Fear kicks in, and inexperienced investors often sell at a loss.
Understanding these market phases helps investors stay calm and make decisions based on data, not emotion.
How Economic Cycles Shape Market Behaviour
The economic cycle (expansion, peak, contraction, recovery) significantly impacts the market cycle.
- Expansion: The GDP increases, quality companies are performing well, and stock prices increase.
- Peak: Growth begins to slow, valuations are beginning to stretch, and risk begins to increase.
- Contraction: The economy will begin to slow down or go into a recession, and the markets will start a decline
- Recovery: Confidence is returning, and preparations are underway for the next cycle.
According to Fidelity Investments, understanding where the economy stands helps investors align portfolios with sectors likely to outperform during each phase.
How Market Cycles Affect Investments
Market cycles do not affect every type of asset in the same manner.
- Stock: Upward in expansions, downward in recessions.
- Bonds: Provide stability when the market drops, but slow growth in good times.
- Commodities: Response to demand globally and inflation.
- Real estate: Based on credit and growth cycle, it lags behind the markets.
To adjust to these cycles, policies in a balanced and diversified portfolio can help to mitigate shifts and lessen the impact of market downturns.
Case Study: COVID-19 Market Crash
A prime illustration of market cycles in action is the COVID-19 crash of 2020.
The worldwide markets entered the markup phase in 2020. The S&P 500 and India’s Nifty 50 were reaching record highs. However, the fear caused by COVID-19 led to an abrupt market crash. The enforced lockdowns banned most business activity, causing a gradual but sharp decline in business activity.
Between February 2020 to March 2020, the S&P 500 dropped more than 30%.
In India, the Nifty 50 dropped from 12,300 in January 2020 to around 7,500 in March 2020, a decline of almost 40%.
However, when governments announced stimulus packages and central banks started cutting rates, the markets began to rally. By the end of 2020, both the Indian and global markets had returned to levels higher than when the pandemic started, entering our current expansion phase with new all-time highs.
The majority of investors who remained invested during this period, understanding the situation and avoiding panic, benefited the most from the market recovery.
Investment Approaches can Evolve in the Context of the Economic Cycle.
Here is how investors can adapt their Investment Approaches based on the phases of the cycle:
- Expansion: Look to invest in growth sectors (e.g. technology, banking and consumer goods).
- Peak: Decrease investments in overvalued equities/assets, rebalance, and maintain a cash position.
- Contraction: Move into defensive equities, bonds, and/or dividend-paying investments.
- Strategy: Look for underperforming opportunities in level sectors that you feel will have a bounce back.
Regularly tracking economic indicators such as inflation, interest rates, and employment data can help identify where we are in the cycle.
Tips for Investors
- Market downturns are not permanent; they always turn.
- Diversification protects against shocks.
- Timing every move is impossible; staying consistent works better.
- Economic data and investor sentiment often signal where the market is heading next.
Why Choose Equentis Investech?
At Equentis Investech, we help investors make sense of market movements. Our research approach tracks economic indicators, stock market cycles, and global trends to create personalised investment strategies.
Whether it’s a bull market or preparing for the next downturn, our team keeps your portfolio focused on balance and the potential for growth at every stage of the market cycle.
Markets will always move up and down; that’s what investing does. Rather than trying to predict every movement, it’s more important to know where you are in the cycle and stay engaged smartly.
With Equentis Investech, you gain a trusted partner that helps you invest strategically, minimise risks, and stay ahead no matter what phase the market is in.
