032_What is the Business Cycle? | Explaining the Flow of Expansion, Recession, and Recovery, and Investment Strategies

Business Cycle | Understanding the 'Four Seasons' of the Economy Reveals Investment Timing

The economy has cyclical fluctuations similar to 'seasons.' This is the 'business cycle.' Understanding which phase you are in improves the accuracy of your investment decisions.

What is the Business Cycle?

The business cycle refers to the cyclical fluctuations in which economic activity repeats the pattern of 'expansion → recession → trough → recovery'.

Just as the seasons repeat 'spring, summer, autumn, and winter,' the economy also moves in waves.

The Four Phases of the Business Cycle

1. Recovery Phase (Spring)

The stage where the economy begins to recover from its trough.

• Unemployment rates begin to improve

• Corporate capital investment increases

• Interest rates are low (central banks are accommodative)

• Stock prices often hit bottom and begin to rise

Investment point: A period when cyclical stocks (materials, capital goods, finance) are likely to start moving

2. Expansion Phase (Summer)

The stage where the economy heads toward its peak.

• Employment and consumption are strong

• Corporate earnings also rise

• Inflation gradually increases

• Central banks may begin raising interest rates

Investment point: Broad gains in sectors like IT and consumer goods. However, be cautious of high prices toward the end

③ Recession Phase (Autumn)

This is the stage where the economy begins to slow down from its peak.

• Consumption and investment decline

• Inventory increases and corporate earnings deteriorate

• Central banks often continue to raise interest rates

• Stock prices tend to become unstable

Investment Point: Defensive stocks (food, healthcare, utilities) are relatively strong

④ Contraction/Recession Phase (Winter)

This is the stage of a full-scale economic recession.

• Unemployment increases

• Corporate bankruptcies increase

• Central banks shift to interest rate cuts and easing

• Stock prices are prone to significant declines

Investment Point: Increase the ratio of bonds, gold, and cash. It is also considered a time to prepare for the 'next spring'.

Leading, Coincident, and Lagging Economic Indicators

There are three types of indicators used to determine the current state of the economy.

Leading Indicators
Move several months ahead of the economy: stock prices, new housing starts, PMI
Coincident Indicators
Move in sync with the economy: industrial production, job openings-to-applicants ratio
Lagging Indicators
Move after the economy: unemployment rate, long-term interest rates

'Stock prices are a leading economic indicator'

It is often said that 'stock prices anticipate the economy six months to a year in advance.' This is why stock prices sometimes start to rise while the economy is still in a bad state.

By the time a recession has begun, stock prices have often already fallen.

Summary

The business cycle repeats in four stages: recovery, expansion, recession, and contraction. Understanding which phase we are currently in helps with adjusting asset allocation and selecting stocks. Investing with an awareness of the "seasons of the economy" leads to long-term success.