Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 12

Intermarket Analysis and the Business Cycle

THE FOUR-YEAR BUSINESS CYCLE

Over the past two centuries, the American economy has gone through repeated up and down cycles. Sometimes these cycles have been dramatic, such as the Great Depression of the 1930s, the runaway inflationary spiral of the 1970s, and the deflation-inspired downturn since 2000. At other times, their impact has been so muted that their occurrence has gone virtually unnoticed. Most of these cycles fit somewhere in between these two extremes and have left a trail of fairly reliable business cycle patterns that have averaged about four years in length. This means that approximately every four years the economy has experienced a period of expansion, which is followed by a contraction or slowdown. Those slowdowns usually coincide with or follow downturns in the stock market. The tendency for the stock market to hit bottom every four years is referred to as the presidential cycle because American presidents are elected every four years.

The contraction phase often turns into a recession, which is a period of negative growth in the economy. The recession or slowdown inevitably leads to the next period of expansion. During an unusually long economic expansion, when no recession takes place, the economy may undergo a slowdown which allows the economy to “catch its breath” before continuing to its next growth phase. When this happens, the time between actual recessions can stretch out to eight years. The ...