If you want to avoid losing 90% of your money in crises again, I’ve compiled economic cycles for you. So, is a crisis looming, or is a rise approaching? Where do we currently stand? In this article, we will answer these questions. It might be a bit lengthy, but we’re confident it will be helpful. Enjoy your reading!
First, we will explain these economic cycles starting from the COVID period and providing examples from 2021 to the present. The graphs you will see are for educational purposes and aim to illustrate economic cycles. Since each period is different, stock market graphs may not look identical; our goal is to clarify the relationship between the economy and the stock market.
- Phase 1: Recovery
In the recovery phase, inflation is brought under control, and room is created for interest rate cuts. PMI indicators for previously struggling sectors begin to rise slowly. Commodities and oil start to increase in value as both interest rates drop and economic activity is expected to rise. Consumer confidence hits rock bottom.
The COVID outbreak in March 2020 affected the entire world, especially with lockdowns in China, causing global production and service sectors to halt. As a result, companies could not make profits, economies faced severe challenges, and a crisis ensued. With the pandemic bringing the global economy to a standstill, governments and central banks announced massive stimulus packages. The U.S. introduced trillion-dollar aid packages and lowered interest rates to stimulate the economy.
Following the initial shock of the pandemic, the commencement of vaccine research, particularly the development of mRNA vaccines toward the end of 2020, increased confidence in the economy; even the initiation of these studies was positively received, leading us into the RECOVERY phase.
When economic activity came to a halt, inflation initially dropped rapidly. Demand fell, as you can see in the visuals. This allowed for the aforementioned incentives and interest rate cuts. Although the incentives slightly raised inflation, it remained under control.
With the implementation of incentives and interest rate cuts, the economy quickly began to recover. The graphs show Bitcoin and the S&P 500. Consumer confidence rebounded, and commodities found their lows. In this phase, inflation-driven oil and housing prices had not yet begun to rise.
- Phase 2: Expansion
In this phase, the economy starts to grow. Due to high economic activities among companies, industrial metals peak. Sector PMI indicators begin to rise. Consumer confidence recovers, and demand starts to increase.
As demand rises, inflation grows according to the magnitude and speed of the incentives provided during this period. Especially due to the Additional Stimulus Package in December 2020 and the American Rescue Plan Act, inflation surged rapidly.
However, during this phase, Powell and other FED members, as well as U.S. Treasury Secretary Yellen, claimed that inflation was somewhat high but "transitory." As a result, the rise in U.S. stock markets continued.
In the expansion phase, oil and real estate prices also began to rise. The FED kept interest rates steady.
If you’re wondering why Bitcoin fell, it was due to Coinbase’s IPO on April 14, which created a major sell-off event. Later, on May 12, Elon Musk stated, "Bitcoin is not environmentally friendly; we will no longer sell Tesla with Bitcoin," causing Bitcoin to crash. Its unregulated status led to a break in correlation with the S&P 500. For Bitcoin to be taken seriously, it must be regulated and used as collateral by traditional finance, but this is a topic for another article.
- Phase 3: Peak Formation
In this phase, the market enters a euphoric state, with stocks or cryptocurrencies rising sharply. Economic activities are high among companies, leading industrial metals to peak. Consumer confidence and demand are at their highest. Sector PMI indicators are on the rise, and positive reports come in.
With demand being high, inflation peaks. At this point, the FED begins to announce, "inflation is too high, we need to raise interest rates," and markets start to decline before the expected rate hikes occur.
For example, the first interest rate hike in 2022 occurred in March, but the S&P 500 peaked in the first week of 2022, while Bitcoin hit its second peak on November 8. Thus, as discussions about rising inflation intensified, markets peaked and began to drop.
Simultaneously, oil peaks due to high economic activity and demand, while real estate prices are also at their zenith. Treasury bonds, on the other hand, remain generally flat.
- Phase 4: Economic Slowdown
In this phase, as interest rates begin to rise, stock markets and Bitcoin decline. Consumer confidence starts to weaken, and demand begins to fall. Sector PMI indicators decline, and economic activity begins to slow.
As interest rates rise, inflation decreases. Hawkish statements from FED members continue, aiming to reduce demand. Efforts are made to increase unemployment to decrease demand; as unemployment rises, people have less money to spend, leading to lower demand and reduced inflation.
In simple terms, when there is no cheap credit and money in the market, economic activity decreases, leading to declines in both the stock market and Bitcoin. When economic activity falls, oil, commodities, and industrial metals generally decrease. As loans become more expensive, real estate prices also drop.
So, Where Do We Stand Now?
Phase 1 – Recovery: Inflation has been controlled, unemployment has risen; sector PMI indicators and economic activity have fallen. As economic activity declined, oil prices also dropped. This situation has opened the door for interest rate cuts. As inflation decreases, the market anticipating future interest rate cuts has already started to rise in stocks and Bitcoin before any cuts are made. However, due to fluctuating inflation and ongoing wars, both the S&P 500 and Bitcoin have shown volatility.
If you pay attention to the two recovery phases, you will notice similarities. Inflation is decreasing. You can think of it like the early months of 2020. At that time, the economic activity slowdown due to COVID had reached a low point before recovering with interest rate cuts and incentives. Now, inflation is decreasing, and economic activity is beginning to rise from a low point due to interest rate cuts. This uptrend is accompanied by stocks and Bitcoin.
Current Economic Data: Inflation has now fallen to 2.5%, unemployment remains high at 4.1% but has dropped from 4.3%, and signs of improving economic activity are evident as price pressures decrease. While production PMI is still declining, the service PMI has recovered. The non-farm payroll data for this month came in significantly above expectations, which might raise concerns about month-to-month inflation increases, yet data such as personal incomes, personal expenditures, and average hourly earnings generally still show a downward trend, indicating a slow recovery. Inflationary pressure does not come from a single data point (TDİ). Therefore, even though a crisis based on rising unemployment and slowing economic activity has not yet occurred, we are currently in the RECOVERY phase. The stock market is at its peak, and some may question how this is a recovery. In this article, we explained the CYCLES OF THE ECONOMY, not the stock market.
CONCLUSION - What Do We Expect Moving Forward? The economy had warmed up with post-COVID stimulus; it cooled down with interest rate hikes and tapering, and inflation has decreased. Now, as interest rates fall, economic activity is set to rise again. Since inflation has decreased and no crisis has emerged based on slowing economic activity and demand, we are experiencing what Powell calls a "soft landing." Since no crisis has emerged, the stock market has not declined and continues on its path thanks to interest rate cuts, at least for now. If no crisis occurs, we will transition from the recovery phase to the EXPANSION phase of the economy. As businesses report better profits, demand increases, consumer confidence rises, and economic activity accelerates, the stock market and Bitcoin will also rise.
In this article, we shared our thoughts on how recent economic cycles will affect investors. None of what we wrote constitutes investment advice; it is purely for educational and informational purposes. If you enjoyed our article, please feel free to share your thoughts in the comments!
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