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Intermarket analysis

Business Cycle Affecting Macro Factors

Now you are aware about the major macro economic factors that you would require in the intermarket analysis. Let's now take a quick look at how these factors function in different phases of the business cycle.


You must have seen how a business cycle looks in the first section. 


A complete business cycle can be analyzed on various timeframes i.e. short-term, medium-term & long-term  However, with rising volatility and monetary intervention the cycles are becoming shorter in length 


Phase I

Phase I is the early recovery of the economy post a recession. The GDP growth numbers are still low as the spending and investments are yet to kick in. Although the general demand is better than it was in recession, the inventory pile up with the businesses does not allow the inflation to kick in yet. RBI will not risk to raise the interest rates yet since the economy is still on ventilator. Interest rates in Phase I are either falling slightly or are bottoming out. The corporate profits have begun to pop up, however, unemployment is still high as companies are still operating at existing capacities. The retail investors are usually late to the party and in this phase they are out of the markets due to the fear of losing money and hence have a pessimistic sentiment towards risky assets like equity.


Phase II

Phase II is popularly called the accelerated growth phase. This phase is characterised by above average GDP growth rate. The demand is so strong that the existing supply of goods and services is no longer sufficient and hence leads to price rising (inflation). Business enthusiasm is at an all time high and managers give bullish guidance like margin and capacity expansion. Corporate profits are on a rise and so is hiring and thus reducing the unemployment in the country. Remember, RBI hates inflation when it exceeds its range. Although inflation is still under control, to stop it from exceeding the upper range, RBI will start raising interest rates. Investor sentiment is very bullish.


Phase III

This phase is the phase of stagnation or deceleration in GDP growth rate. There are signs of stress like high inflation and high interest rates. These all lead to lower corporate profits and institutions re-thinking about their hiring policies which crops up the fears of unemployment rising in the near future. Investors, especially retail investors continue with the FOMO (fear of missing out!) and are struck by buying assets at all time high prices.


Phase IV

The dust that started to rise in the previous phase (Phase III) will take the shape of a storm now. Phase IV is the ultimate recession, where none of the macro factors seems good. RBI cuts interest rates rapidly, however, the investment picks up only when the storm passes by and we again enter into Phase I. 


The table below will brief you about how the macro factors move in various phases of the business cycle.



Once we are clear with the factors affecting different asset classes, now let us move towards exploring how various asset classes are interconnected.

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