Interrelation between Economic cycle & Stock market cycle
Now that we understand both the economic cycle and stock market cycle let us discuss the interrelation between the two.
How is the Stock Market Cycle and the Economic Cycle inter-related?
The stock market cycle typically runs more or less parallel to the economic cycle – but it is always ahead of the economic cycle as explained above. Most economists and analysts consider the stock market as one of the leading indicators to determine where the economy is heading and to estimate the degree of expansion or contraction in the next phase of the economic cycle.
Stock markets are forward looking and they reflect expected future earnings. It is important to have a clear understanding of the time lag between the economic cycle and the stock markets.
The lag between the stock market cycle and the economic cycle creates a challenge for investors, as strong emotions at both peaks and troughs push people into buying high and selling low – exactly the opposite of what they should be doing.