Definition
The business cycle consists of four phases: expansion (growth), peak (maximum output), contraction/recession (decline), and trough (minimum output). Different asset classes perform differently through the cycle: equities and commodities lead in early expansion, bonds outperform in contraction, and cash is king during the crisis phase. Understanding cycle positioning is essential for tactical asset allocation.
lightbulb Example
Early expansion: buy cyclical stocks, reduce bonds. Mid-expansion: rotate to growth stocks. Late expansion: increase commodities, reduce duration. Recession: overweight bonds and defensive stocks. This cycle-aware approach enhances risk-adjusted returns.
verified_user Key Points
- Four phases: expansion, peak, contraction, trough
- Different assets outperform in each phase
- Average cycle length: 5-7 years
- Cycle timing drives sector rotation strategies