On the Business Cycle
1. Characteristics of the Four Phases of the Business Cycle
The economy does not grow in a straight line, but rather cycles through repeated periods of expansion and deceleration. Generally, it is classified into the following four phases.
Recovery Phase
Expansion Phase
Recession Phase
Bottoming-out Phase (Depression Phase)
In each phase, characteristic movements are observed in GDP, employment, prices, interest rates, stock prices, and corporate earnings.
1. Recovery Phase
The stage where the economy emerges from a recession and economic activity begins to pick up. A financial market phase where stock prices rise due to expectations of future earnings recovery while interest rates remain low.
A financial market phase where stock prices rise due to expectations of future earnings recovery while interest rates remain low.
GDP: Transition from negative to positive growth, with production and consumption gradually recovering
Employment: Unemployment rate is still high but improving, and new hiring begins to increase
Prices: Low level, with deflationary pressure receding
Interest Rates, Stock Prices, and Corporate Earnings
Central banks continue monetary easing, and interest rates remain low
Stock prices tend to rise in advance
Corporate earnings bottom out
Market Characteristics
Expectations that "the worst is over" often lead the stock market to react more strongly than the actual economic reality.
2. Expansion Phase
A phase where economic recovery becomes full-scale and economic activity expands vigorously. It becomes an earnings-driven market where strong corporate performance supports stock prices, and small-to-mid-cap stocks are also bought toward the end of the phase.
GDP: High growth continues, with both capital investment and personal consumption remaining strong.
Employment: Approaching full employment, with upward pressure on wages increasing.
Prices: Inflation rate rising, with service prices and wages also increasing.
Interest Rates, Stock Prices, and Corporate Earnings
Central banks are moving toward interest rate hikes.
Long-term interest rates are also rising.
Corporate earnings are strong and stock prices tend to rise, but rising interest rates become a burden in the latter half.
Market Characteristics
It tends to be an earnings-driven market, where expanding corporate profits push up stock prices.
3. Slowdown / Recession
A phase where the economy slows down due to monetary tightening and weakening demand, leading to a reverse financial market and a reverse earnings market.
GDP: Growth rate declines, potentially leading to negative growth in some cases.
Employment: Hiring is restrained, and the unemployment rate rises.
Prices: Remain high before slowing down; inflation settles as demand decreases.
Interest Rates, Stock Prices, and Corporate Earnings
Expectations for a pause in rate hikes or interest rate cuts.
Corporate profits deteriorate.
Stock prices are prone to correction.
Market Characteristics
A tug-of-war between 'economic slowdown' and 'monetary policy shift.'
Cyclical stocks tend to weaken due to concerns over deteriorating earnings.
4. Trough
A stage where the economic downturn has run its course and the economy is exploring a transition to the next recovery phase.
GDP: Bottoming out at a low level
Employment: Employment conditions continue to worsen, but the pace is slowing
Prices: Inflation is cooling, with a disinflationary trend
Interest Rates, Stock Prices, and Corporate Earnings
Rate-cutting phase
Bond market improves in advance
Stock prices bottom out ahead of the economy
Market Characteristics
The real economy is weak, but it begins to price in the 'next recovery'.
Key Economic Indicators for Assessing the Business Cycle
It is important to check 'leading indicators' for the economy.
Leading Economic Indicators
Manufacturing PMI: A representative indicator of business sentiment. Above 50 indicates expansion, below 50 indicates contraction
Initial Jobless Claims (US): Easily captures early signs of employment deterioration.
Yield Curve: The spread between long-term and short-term interest rates.
An inverted yield curve is famous as a recession signal.Consumer Confidence Index: A leading indicator for personal consumption.
Housing-related indicators: Housing starts and existing home sales. Highly sensitive to interest rates and easily reflect economic turning points.
Coincident Economic Indicators
Real GDP
Industrial Production
Retail Sales
Employment Statistics
Indicates the current state of the economy.
Lagging Economic Indicators
Unemployment Rate
Core Inflation
Wage Growth Rate
Tends to move after a business cycle turning point.
2. Examples of Past Business Cycles
IT Bubble Burst (Around 2000)
In the United States in the late 1990s, expectations for a "New Economy" rose rapidly against the backdrop of the spread of the internet. In particular, huge amounts of capital flowed into IT and telecommunications-related companies, leading to a situation where stock prices rose significantly based solely on "future potential," even for companies that were not yet profitable.
In terms of the economy, personal consumption and capital investment were very strong, and the U.S. economy was in an expansion phase. On the other hand, a sense of overheating was gradually increasing, and the FRB (Federal Reserve Board) implemented interest rate hikes to curb inflation.
However, around 2000, when doubts began to arise regarding the performance of IT companies that had been bought based on "anticipation," investor sentiment deteriorated rapidly. Stock prices, centered on the Nasdaq index, plummeted, and many IT companies were driven to bankruptcy.
In this phase,
stock prices fell ahead of the real economy,
monetary tightening served as a turning point for the overheated market,
and valuation adjustments proceeded rapidly once "growth expectations" faded,
are cited as major characteristics.
Lehman Shock (2008)
In the mid-2000s, the U.S. housing market expanded rapidly against a backdrop of a low-interest-rate environment. Financial institutions aggressively expanded mortgage lending, and even 'subprime loans' for borrowers with low creditworthiness were supplied in large quantities.
Furthermore, these loans were securitized and sold to investors around the world, causing risks to spread throughout the entire financial system. At the time, the assumption that housing prices would continue to rise was deeply ingrained in the market, and financial institutions were also increasing their risks while maintaining high leverage.
However, when delinquency rates rose triggered by interest rate hikes by the FRB and a decline in housing prices, the value of subprime-related products plummeted. In 2008, the major investment bank Lehman Brothers filed for bankruptcy, which developed into a global financial crisis.
In the financial markets,
a sharp drop in stock prices
credit contraction
a shortage of dollar funding
a simultaneous global recession
occurred, and corporate performance and the employment environment also deteriorated rapidly.
Central banks in various countries implemented large-scale monetary easing, and the FRB introduced quantitative easing (QE). From this point on, the world shifted into an era where 'low interest rates' and 'market support by central banks' would be prolonged.
The Lehman Shock is still positioned as an important recessionary phase as
'a typical example of financial system instability spreading to the real economy'
.
Corona Shock (2020)
In 2020, due to the global spread of the novel coronavirus, governments around the world implemented lockdowns and travel restrictions. As a result, many economic activities such as dining out, travel, aviation, and retail came to a sudden halt, and the global economy fell into a sharp recession in a short period of time.
Previous recessionary phases were often caused by monetary tightening or a slowdown in demand, but the Corona Shock is characterized by the fact that it was triggered by a unique factor: 'the suspension of economic activity due to an infectious disease'.
In the first half of 2020, a rapid slowdown in GDP, a sharp rise in the unemployment rate, and a plunge in stock prices occurred simultaneously, causing significant turmoil in the financial markets.
However, subsequently, large-scale fiscal stimulus and monetary easing were implemented by governments and central banks in various countries. In the U.S. in particular, cash benefits to households and ultra-low interest rate policies were introduced, and surplus funds flowed into the stock market. Stock prices, especially those of high-tech companies, recovered rapidly.
On the other hand, because the economic recovery overlapped with supply constraints, the inflation rate soared, and from 2022 onwards, the FRB shifted to rapid interest rate hikes.
In the Corona Shock,
the speed of both the recession and the recovery was extremely fast
Fiscal and monetary policies strongly supported market recovery
Inflation issues emerged after the recovery
These are some of the characteristics, and it had strong aspects of a "policy-driven cycle" that differs from traditional business cycles.
3. Current Situation Assessment (as of 2026)
The current global economy is in a phase of exploring "whether or not there will be a re-acceleration" from a "slowdown phase that is avoiding a recession."
US Economy
Economy: Personal consumption remains firm, and the labor market has not completely collapsed; however, the cumulative effects of high interest rates are gradually becoming apparent.
Prices: Inflation was thought to have peaked, but there are concerns about re-acceleration due to the manifestation of geopolitical risks.
Monetary Policy: The FRB is carefully assessing the timing of interest rate cuts, remaining vigilant against both the risks of "economic deterioration" and "resurgent inflation."
Market: While AI-related investments are supporting the market, valuations are high. Volatility tends to increase during periods of rising interest rates.
Japanese Economy
Economy: Nominal growth rates are improving, with inbound tourism and capital investment serving as supporting factors.
Prices: The establishment of wage increases is the focus, with price increases around 2% continuing.
Monetary Policy: The Bank of Japan is moving toward normalization. There is upward pressure on long-term interest rates.
Market: Financial stocks and value stocks have the advantage. On the other hand, rising interest rates are a burden on high-PER stocks.
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