Section 4.4

Business Cycles

In life, we often do not want what we need.  Young investors should pray daily for protracted, devastating bear markets where their early contributions can have terrific gains when the market moves back up.  Older investors pray daily that markets will rise and keep rising so that their nest eggs remain healthy.  The truth is that both will be accommodated.  Bull markets happen, and so do bear markets.  Never forget that the long-term trend since the inception of modern markets has been upward.  For this reason, it is always more dangerous to be out of the market than in it.

The business cycle is the recurring pattern of expansion, contraction, and recovery in the economy.  In basic terms, the business cycle is measured and tracked in terms of GDP and unemployment–GDP rises and unemployment shrinks during expansion phases, while reversing in periods of recession.  Wherever one starts in the cycle, the economy is observed to go through four periods–expansion, peak, contraction, and trough.

Business cycles, then, are the “ups and downs” in economic activity, defined in terms of periods of expansion (growth) or recession (decline).  During expansions, the economy, measured by indicators like jobs, production, and sales, is growing (in real terms, after excluding the effects of inflation).  Recessions are periods when the economy is shrinking or contracting.


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