Markets are prone to cyclical behavior, which presents risks and opportunities for investors. Here are some basics investors should know about market cycles, recessions, and recoveries.
Market cycles, as the term suggests, happen again and again over time, and they cover a wide range of types: bear markets and bull markets, sell-offs and rallies, and expansions, recessions, and recoveries. These cycles come in different shapes, sizes, and durations, and no two are exactly alike.
By understanding the various definitions of market cycles, learning how to identify them, and seeing how they've played out over time, investors can potentially gain valuable insight for portfolio strategy.
In general, cycles refer to the idea that markets—including stock prices—go through a process of ups and downs and buying and selling amid shifting beliefs and opinions over valuations for equities and other assets. Investors can use knowledge of market cycles to inform their decisions, but there are a few important things to know.
Market cycles vary in length
Names are often assigned to market cycles. A bull market is a long-term uptrend marked by optimism and a robust economy. By contrast, a bear market is a prolonged downtrend, usually marked by declines of 20% from recent highs, accompanied by widespread negative sentiment. The record bull run in U.S. stocks, which began in early 2009 and ended in March 2020, is a recent example of a long-term market cycle.
Long-term cycles can also include several shorter cycles. For example, within a long-term cycle, there might be short-term sell-offs that didn't turn into bear markets or periods of largely sideways price movement. As illustrated in the chart below, investors can reference a monthly chart of a benchmark like the S&P 500® index (SPX) for the past 20 years to identify previous long-term market cycles.