The end of an economic expansion AND a bull market?

Is it possible to be at the end of an economic expansion and the end of a bull market?  What do both of these things mean?  Please follow along as we answer this question.

What is an economic cycle?

The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to determine the current stage of the economic cycle [Source.]

You can see below in the first chart the shaded grey areas representing historical recessions.

Source: FactSet, The Conference Board, as of January 31, 2018

Source: S&P 500 Index (.SPX:INDEX)

The second chart is the S&P 500 index over the same time period.  We have overlaid the recessions from the first chart with the index.  During times of recession we see an end to a bull market switching to a bear market.  Words that are used to describe points in an economic cycle are: expansion, contraction, peak (top), or trough (bottom).

Now, what is a bull or bear market?

A recession happens when we see trade and industrial activity reduced, generally by a fall in GDP in two successive quarters.  These describe how the economy is performing.  Currently we are in the midst of an expansion awaiting when this might peak and turn into a contraction and even recession, which could still be years away.

Now, what is a bull or bear market?

As the economic cycle moves forward, the stock market does too.  To describe how the stock markets are performing words like bear or bull market are used.  As you can see in the definitions above these simply mean that the market prices are moving upward or downward.  So, the market being bullish or bearish is used to describe how people are investing in the midst of the various economic cycles.

To answer our initial question of whether an economic expansion and a bull market end at the same time, let’s look at the charts above.  The two most recent recessions in 2001, 2008-2009 do show that the bull market ended when the economic expansion ended. This makes sense because people invest based on what they see going forward.  A recession or contraction of the economy would lead investors to believe that lower prices are ahead and be more likely to sell stocks.

The economy will continue cycling forward and the market will continue to move between bull and bear markets.  You have to understand where you are with respect to your goals and how long until achieving those so you can adjust your investment portfolio accordingly.  Take a look at our previous blog post where we suggested you consider the economic cycle as you invest.

 

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