The economic situation is turning - a few words about the cyclical nature of the economy

Supposedly, fortune revolves around the wheel - similarly to the economic situation, which over time is subject to various fluctuations. Thanks to the observations of the business cycles, it is possible to try to predict the periods of prosperity and depression, and thus also the direction of changes in share prices. Over the years, many theories have emerged, both short-term and long-term. Is it worth betting on one of them? Or maybe the various cycles interpenetrate each other?

While the current American-dominated financial world order seems unchanged to us over the years, historically it may be just one of the cyclical phases. According to the controversial thesis of the Briton John Glubbmost empires exist for around 250 years. Certainly, one should be skeptical about it, but anyone who has seen the last scenes of the evacuation of Americans from the Kabul airport or reads reports on the scale of the US economy's economic imbalance (budget deficit, current account balance, etc.) should at least for a moment think about it. Especially if it actively invests in the US stock market.

Perhaps we will still have to wait for the decline of the American market dominance, but the theory of the cyclical nature of the economy, which consists in fluctuating economic measures based on a growing growth trend curve, is certainly true. By observing short-, medium- and long-term cycles, we can predict the directions of changes in the market and base on them when making investment decisions. However, there are many classifications of cycles: geopolitical, economic, seasonal cycles ... Which ones to bet on in your investments?

Geopolitical cycles

Since the economy is inextricably linked with politics, one of the oldest known economic cycles is the geopolitical one. An example would be theory of hegemonic cycles, created by a scientist born in Poznań as Jerzy Modelski, and operating in the United States as George Modelski. It postulates the existence of a cycle generated by global competition between powers over the past hundreds of years. According to this concept, when a power becomes hegemonic, it is challenged by other great powers. One of them achieves a power equal to the world power and wants to take its place, which leads to a hegemonic war - to obtain or maintain the status of a hegemon.

The last hegemonic war took place at two speeds - two world wars - separated by the interwar period. Great Britain joined it as a global hegemon. The real contender was the USA, which already in the 70s became the largest economy in the world, but wisely let ambitious Germany through the door - by starting both wars, it weakened the hegemon that had been so far. The period of the hegemonic war ended with the Yalta Conference in 1945, thus setting a new world order. The USA left this period as a new hegemon, further strengthening its position after the collapse of the co-victor in World War II, i.e. the Soviet Union.

It is also easy to indicate previous hegemonic fights, for example the one from the Napoleonic wars, which ended with the Congress of Vienna. Looking at the theory from a historical perspective, it is easy to see that the duration of one cycle is approximately 130 years. This would mean that another war for hegemony would begin around 2044. Whether this will happen, we will probably find out soon.

Economic cycles

Another type of business cycle are those noticed and identified by famous economists. Among them are the so-called Kondratieff cycles. This term was coined by Joseph Schumpeter named after the discoverer of this phenomenon, the Soviet economist Nikolai Kondratiev, who in the 20s published a work analyzing the course of the economic situation in the economies of England, Germany, the USA and France at the turn of the 45th and 60th centuries. Thus, he put forward a thesis that there is a 80- to XNUMX-year business cycle. The concept of the Kondratieff cycle was quite popular in the US - especially among stock market bears, such as the elliocista Robert Prechter - back in the XNUMXs, because it suggested the impending "Great Depression" at that time, similar to the one from the XNUMXs. As we know, nothing like that happened, and the collapse of the Soviet bloc at the turn of the 80s and 90s opened new prospects for the economy of the USA and other capitalist countries. Since then, this idea is no longer popular.

Another theory could be Kuznets cycle. It was discovered in 1930 and its author Simon Kuznets was the winner of the Nobel Prize in Economics. According to him, the economic situation comes full circle in about 15-25 years. The cycle is mainly influenced by demographic processes and changes in the level of construction investments. The theory still seems to play a large role in the economy. Currently, after the collapse in real estate prices that began in 2007, the global real estate market is in another upward phase. Synchronization of the current Kuznets cycle with the previous two suggests another global real estate peak at the turn of 2023 and 2024. This, of course, is only a clue, but it may turn out to be a key indicator of when the next global crisis may lie ahead.

Even shorter periods are characterized by the so-called Juglar cycles, proposed by a French statistician Clement Juglar as early as 1862. It is a cycle of investments in fixed assets, the breakdown of which at some point generates a classic economic recession. For example, the economic recession in the US in 2007-2009 was caused by the collapse of the investment bubble on the real estate market, the cause of the recession in 2001 was the collapse of investments in the "technology" sectors of IT and telecommunications, causing the Internet "bubble" to burst on stock exchanges, etc. Postulates The Juglar cycle, to simplify, from one economic recession to another, appears to be 7 to 11 years old, which roughly corresponds to the American experience of the last half-century. It's worth remembering that buying US stocks near the lows of the economic recession in this country has almost always been a very good decision. In order to apply such a strategy effectively, it is necessary to be able to effectively mark the date of this peak of recession, which in itself is difficult. The cycles of established economists, however, seem to facilitate this challenge.

Calendar cycles

There are also cycles determined by specific time intervals, such as the seasonal - annual cycle. The sequence spring, summer, autumn, winter repeats so regularly that we have got used to it a long time ago. The belief that the situation on the stock market is also subject to seasonal fluctuations is reflected in commonly known stock exchange adages, such as "Sell in May and go away". As hard to believe, this saying was not born on Wall Street at all. It's older, it's from England, specifically the London financial district, where it originally sounded "Sell in May, go away, and come on back on St. Leger's Day ". It described the practice of merchants, bankers, and nobles who sold stocks in May and left the city on vacation, then returned to take part in the St Leger Stakes horse race in September.

In the United States, the date of return to the stock market moved to Halloween on October 31. Even in the nineteenth century, when the economies of even the most developed countries were still dominated by agriculture, the dependence of the stock market on seasonal fluctuations in agricultural production could seem as natural as possible. Nowadays it is a bit harder to explain. The spring dividend payout trend may be a clue, stimulating demand for stocks ahead of time. In fact, statistically speaking, the worst month of the year for US stocks is September, and the define October as "Month of crashes" it did not come out of nowhere. The explanation for this phenomenon can be found in the specifics of the American tax system, in which the financial year ends at the end of September and until then investors can sell shares at a loss and use it to reduce the tax due. However, when buying back these shares, they must take into account one caveat put by the American legislator: if someone wants to take into account a loss incurred on shares, they cannot buy them back sooner than after a month. In summary, it is therefore about a tax-reducing sale of shares at a loss at the end of September and the beginning of their repurchase at the end of October.

What cycles to bet on?

Probably the answer to this question would provide us with great wealth. Unfortunately, it would be much simpler to make predictions if the story were in fact perfectly cyclical. Meanwhile, various theories are sometimes mutually exclusive and often permeate, and none is infallible. However, as he points out Wojciech Bialek, the author of the blog K (NOW) FUTURE, it is worth observing even different business cycles, as they are often the source of the concepts of technical analysis, which are a response to various doubts of investors.

More on what is worth paying attention to when using cyclicality in your investments can be found in the e-book "Investing in the economic cycles". Wojciech Białek prepared it together with TMS Brokers - Part of the e-book can be downloaded for free at the link below, and the entire 68-page e-book will be available to anyone who decides to open an account.

We would also like to remind you that for opening a stock account with TMS Brokers, you can receive the book Reminiscences of a stock exchange trader by Edwin Lefevre as a gift. After creating such an account, please contact sales@tms.pl in order to determine how the book would be delivered.