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Financial Markets & Business Cycle

Bonds , Stocks and Commodities

Each market has a tendency to peak & trough at different points during the business cycle in consistent chronological manner

Economy status
1- Expanding 2- Contracting 3- Equal ( period of zero growth ) very rare condition

Business Cycle

Economy is slowing down

Bond market is the ( Leader )

While economy is declining , intrest rate is declining too

Bond market is the 1st financial market to begin a bull phase usually after the growth rate in the economy has slowed down from its peak rate & is delayed until the initial stages of recession Reversal relationship between Bonds & intrest rates

Bear Market begin

Following the bear market low in bond prices ( bonds is bottoming out) , economic activity begins to contract more sharply

At this point , investors in stock market begin accumulating stock which are now declining sharply because of the recession ( stocks are bottoming out )

Economy is recovering

After recovery has been under way for some time , commodity prices start to bottom Commodity prices reach their actual bottom during the recession due to severe margin liquidation on behalf of speculators At this point , all three financial markets are in rising trend Gradually , the economic & financial weakness , is absorbed, putting upward pressure on the price of credit

Economy is expanding again

Now its the time to rise intrest rate again, since rising intrest rate mean falling bond prices, the bonds market peaks out & begins its bear market phase ( bonds peaks out ) Stock market discounts trends in corporate profits, so it remains in an uptrend until investors sense that the economy is becoming overheated & the potential for an improvement in profits is very low ( stocks peaks out )

At this point , theres less reason to hold equities , and they in turn enter into its bear market phase
Commodities peaks out as well

Now .. All three financial market begin to fall, they will continue declining until the credit markets bottom out

Six Stages

Since therere three financial markets, and each one have two turning points, so we should have six turning points in a typical cycle

Longer Cycle ( Double Cycle )

Some expansion enclose much longer period, it usually include at least one slowdown in the growth rate followed by a second round of economic expansion A double cycle developed in the 1980s and another in the 1990s