Understand the ups and downs of the market cycle

When it comes to investing, there’s something that everyone should know:

Over the long term, markets trend upward.

That’s easy to lose sight of during periods of uncertainty or when markets experience a significant decline. But history has consistently shown that markets tend to recover from setbacks.

Still, there is good news. Periods of uncertainty have happened before. History consistently shows us that markets recover and trend upwards, presenting a unique opportunity to invest when prices are low.

The four stages of a market cycle

An investing reality that we often forget is that market fluctuations, also known as “volatility,” can exist through every phase of the market cycle. We simply notice it more when markets go down, because losing money generates far more emotion than seeing incremental gains, which is what we expect an investment to do over time.

While market fluctuations can be unsettling, they’re inevitable, and no one can predict when they will happen. Understanding how market cycles work can help you maintain perspective so you can focus on your investment plan.

The four stages of a market cycle are:

• Accumulation This is when investors – thinking that markets have “bottomed out”– begin buying again because prices are low and value is high.
• Markup is the second wave of buying, when the market is more stable. This stage is easier to identify, with media and news outlets highlighting the upward trend and investors putting their money back into the markets.
• Distribution is the phase when market momentum begins to slow and investors become more divided on prospects. The “Bull market” that was pushing prices higher begins to level off, and a relatively equal amount of buying and selling is seen.
• The downtrend, sometimes called the “markdown,” is the final stage – triggered by widespread selling, as investors try to lock in profits and avoid major losses. A prolonged downtrend phase becomes a “Bear market.”

The difference between Bulls and Bears

While these terms are universally used to describe which way the market is trending, there are different definitions of what marks the beginning and the end of each trend – often, a rise or fall of 20 per cent or more in stock prices. In reality, it’s any prolonged period of upward (Bull) or downward (Bear) movement within the markets.

The best way forward

There are countless factors influencing market cycles, including economic growth, interest rates, inflation, corporate earnings and geopolitical developments. Some are easier to see coming than others. Getting through times of uncertainty isn’t about knowing which stage of the market cycle we’re in. Typically, we don’t know that until we can look back and clearly identify the beginning and end of each preceding stage.

The advantage doesn't come from predicting market cycles. It comes from understanding that they're a normal part of investing and maintaining a plan designed around your personal goals.

Our financial representatives^* are here to help you navigate through each market cycle so you can worry less about your investments. For more information, and for resources and financial-market news, visit Market View.