Market Cycles

Causes and Effects of Waves in the Financial Forum and Real Economy

A Market Brief
by

Steven Kim

MintKit Investing
www.mintkit.com

Disclaimer This brief is provided as a resource for information and education. The contents reflect personal views and should not be construed as recommendations to any investor in particular. Each investor has to conduct due diligence and design an agenda tailored to individual circumstances.

2011 MintKit.com

Summary

A host of market cycles crop up in the financial forum as well as the real economy. In fact, the two domains of the virtual and tangible are interlinked in myriads of ways. As an example, the action in the stock market depends for the most part on events taking place in the external environment. In the opposite direction, the goings-on in the financial arena affect the vitality of the economy at large. Looking at the big picture, the whole environment made up of natural forces as well as human factors plays a crucial role throughout the marketplace. A showcase lies in the impact of the weather on concrete goods as well as virtual assets. For instance, the onset of winter kindles the demand for heating, the prospect of which prods merchants in the commercial realm and traders in the futures market into bidding up the price of oil in advance. In these ways a heap of cyclic themes show up everywhere, from stocks and bonds in the capital markets to crops and toys in the real economy. Moreover, the hardy motifs span the spectrum of time scales, from less than a month to more than a decade. * * * Keywords: Cycles, Waves, Market, Stocks, Bonds, Economy, Financial, Forecasting, Prediction, Causes, Effects, Patterns * * *

* * * A raft of cycles hold sway in the financial forum as well as the real economy. Moreover, the two domains of the virtual and physical are intertwined in complex ways. To begin with, the realm of capital is driven in large measure by events in the world at large. A good example involves the impact of a technical breakthrough or the fallout from a natural disaster on the vigor of the stock market. In the converse direction, the financial bazaar affects the course of the economy in sundry ways ranging from the cost of capital for producers to the zest for spending by consumers. Behind the whole lot, the natural environment plays a fundamental role across the board. To begin with a plain example, the onset of winter kindles the demand for heating. In view of the impending surge in sales, the traders in the commodity market bid up in advance the price of petroleum along with offshoot products such as fuel. To cite another sample, the heat of the summer is wont to drive the actors in the stock market away from their trading desks. The exodus from the bourse leads to a cutdown of demand for equities. As a result, the stock market has a habit of losing steam and thrashing around during the warm half of the year.

More generally, loads of recurrent themes show up in markets of all types, be they stocks or currencies, realty or commodities. Moreover, the cyclic motifs span the rainbow of time scales, from less than a year to more than a decade. An example of a short-term template lies in the usual hop of the stock market around the turn of the month. Meanwhile, a pattern that plays out over the course of the year involves the seasonal change in the price of wheat in tune with the timetable for planting and reaping. An instance of a larger scheme involves the fluctuation of interest rates across the span of a business cycle that on average runs around half a decade. Moreover, the far end of the time scale is spotlighted by the long wave of natural resources, which tend to wax and wane over a stretch lasting more than three decades. The upspring of waves in the marketplace belies the traditional theories of investment finance based on the notions of ideal assets and flawless traders. In a world of perfect efficiency and boundless rationality, there would be no reason for recurrent molds of any sort to crop up in the financial patch. Despite the glib claims of the orthodox faith, though, cycles of diverse stripes and lengths do show up time and time again. Moreover, the subject of hardy waves cuts across the panoply of human enterprise. As an example, a spate of foul weather can ruin the yield on the farm, which in turn drives up the price of food. The spike in the grocery bill leaves less money for each household to spend on tangible goods as well as financial wares. The resulting slump in sales throughout the economy ends up squelching the profits of the vendors. The specter of a flop in earnings then sparks an upset in the stock market. In these ways, the natural environment plays a primal role in the fortunes of the tangible economy as well as the financial forum. From a pragmatic stance, the welter of links and loops in the marketplace affects every member of the society at large in their varied roles as consumers and producers, employers and hirees, investors and policymakers. For this reason, a working knowledge of market cycles deserves a place of honor amongst the basic set of skills for each participant in the financial forum as well as the real economy.