In the changeable world of investment markets, one thing is certain: In some periods prices go up, and in other periods they go down. The pace of this recurrent cycle of gains and losses isn’t predictable. And the peak of a rising market or the bottom of a falling market is almost impossible to pinpoint until months after it has happened. But market cycles are a fact of life.
To understand how market cycles affect you as an investor, you need to know that:
1.
Cyclical patterns recur
in all
asset
class
markets — the stock market, bond market,
money market, and real estate market — and in all the
subclasses, or smaller segments of those markets. For example,
sometimes the majority of stocks are gaining value and other
times stock prices overall are flat or falling. Similarly,
sometimes large-company stocks increase in value faster than
small caps, and vice versa.
2.
The cyclical pattern in one asset class tends to work in opposition to what’s occurring at the same time in another class. For example, when the stock market is gaining value, the bond market may be flat or falling. And the reverse is true as well. However, there are exceptions, when both markets are strong or weak.
Bulls and bears
When the stock market, measured
by the market indexes, continues to gain value over
a period of time, it’s known as a
bull market.
But when the market — measured by the Dow Jones
Industrial Average (DJIA) — drops 20% or more
from its most recent high, it’s considered a
bear market.
