Intermarket Analysis and the Business Cycle

This chapter examines various economic cycles that influence the financial markets and the economy. The presidential cycle helps explain the tendency for stocks to bottom every four years. The business cycle is also responsible for rotations that take place among the various asset classes. The Kondratieff Wave measures a long economic cycle, which turned down during 2000. A peak in the 18-year real estate cycle caused the housing collapse during 2007 and 2008. A bottom in homebuilding stocks suggests that the worst may be over for housing.

The Four-Year Business Cycle

The American economy goes through repeated up and down cycles. Sometimes those cycles have been dramatic, such as the Great Depression of the 1930s, the inflationary 1970s, and the housing-inspired collapse during 2008. At other times, their impact has been less extreme. These business cycles average four years in length. That means that every four years, on average, the economy normally goes through a period of expansion and contraction. Those contractions usually follow downturns in the stock market. The tendency for the stock market to bottom every four years (usually during the midterm election) is referred to as the presidential cycle because American presidents are elected every four years.

The Presidential Cycle

Figure 8.1 shows several examples of stock market bottoms tied to the four-year presidential cycle. The last six bottoms occurred during 1990, ...

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