The Cyclical Trend in Stock Markets

Share This Post

Share on facebook
Share on linkedin
Share on twitter
Share on email

Every economy has a cyclical trend. There are phases of contraction and phases of expansion of the economic cycle.

Generally, these economic cycles draw minimums and maximums on the graphs of the various asset classes.

Cyclical Trend: Economy Contraction

When the economy shrinks, central banks implement an expansive monetary policy and therefore, a reduction in interest rates.

The reduction in interest rates causes an increase in bond prices. This is because the new bonds have a lower yield than the old ones and therefore a higher cost.

Investors try to buy bonds at the highest rate and are willing to pay them more. The market expectation must also be considered. More traders expect future rate cuts and more the price of bonds rises.

Many times the simple news of the lowering of rates to move entire markets is enough.

During a recession, the real economy is at its lowest point. Meanwhile, the stock market may have already started to rise again. Stock market valuations are also based on expectations. If traders believe that low rates will help the real economy, the share price starts to increase.

Cyclical Trend: Expansion

The real economy is slower than financial markets, and therefore, the expansion phase will come sometime later. In the meantime, the shares could be at their highest. Likewise, even commodities will have increased their quotations.

When the real economy is in its peak of expansion, central banks will have to start raising interest rates.

In fact, during the expansion phase, consumer prices will tend to rise also due to the rise in commodity prices.

The central bank has the main objective of controlling inflation. The tool to control inflation is interest rates.

The economy will react slowly to rising interest rates. The stock and bond markets could respond violently. In recent years we are witnessing a dizzying fall in interest rates. Whenever banks try to raise rates, the markets react exaggeratedly. It almost seems that we can never return to normal.

So the stock and bond market will once again anticipate the real economy. Commodities will take longer to turn down.

When even the real economy starts to deteriorate, it will enter the phase of contraction of the economic cycle. In the meantime, the shares and bonds will already be at a minimum. The central bank will start lowering rates, and everything will start all over again.

MORE FROM FINANCE STRATEGY SYSTEM

Options Liquidity and Open Interest

The American Association of Individual Investors (AAII)

TradeStation Strategy – Bollinger Bands Reversal Price Exit Setup

The Stock Market in the Long Period and the GDP

What is the Dow Theory in technical analysis

Daneric’s Elliott Waves Blogspot: trader’s blog review

The VIX Essential Tutorial || S&P500 Implied Volatility Index

ZeroHedge Website Review || 2020 Finance Blogs Review

How does volatility affect option prices? Call & Put options price

How to find the perfect SuperTrend Settings

 

 

Resources: Wikipedia

Subscribe To Our Newsletter

Get updates and learn from the best

Recent Posts

Eurusd Chart Technical Analysis || 2020

In this page, we study Eurusd using a lot of technical analysis indicators and strategies. Eurusd Analysis using RSI Indicator Today we analyze the Eurusd

Donate

My name is Luca. I grew up in Italy. I have a degree in law and I’m an independent trader since 2007. 

I’m a systematic trader and sometimes, I trade using options strategies with US ETFs and Stocks.

I have built hundreds of automated trading systems and indicators for TradeStation, MultiCharts and MetaTrader.

I started this blog in 2017 to share what I learned in the financial market.

Follow us on :-

WhatsApp us whatsapp