Understanding Market Cycles and why they're important

Understanding Market Cycles and why they're important

Understanding market history takes the emotions out of investing.  When you understand the “normal” ups & downs and that they are all a part of the process, you will be less fearful and more opportunistic and stay the course.  These cycles create never-ending opportunities for investors like us.

History in the Stock Market always repeats itself, human nature (emotions, ego, fear and greed) and human psychology hasn’t changed from this market cycle all the way back to the Panic of 1907.  Hell, even back to Tulip Mania in the Netherlands back in 1636-37 that took over the world.

The Market is human nature on display.  So remember, market corrections are a natural and normal adjustment, not something to panic or lose confidence about.  What is actually happening is that the market is getting rid of the weak investors and scaring them out leaving behind the strong investors.  When all the weak share holders are gone, there isn’t anyone left to sell, the market begins to move up again.  This builds strength in the underlying market and builds the next eventual leg up.  Now as the market moves up again more and more people notice that the prices are going up and they once again buy and push prices higher.  Never get depressed or discouraged during these down periods, as I said before, there will always be another ever expanding group of new companies, new products and services that will lead our economy higher.

The Market (S&P 500, NASDAQ and Dow) Bull Markets typically average 3-4 years and Bear Markets last from a few months to 2+ years.  Some Bear Markets, dictated by lots of other factors, may last longer and may  be more severe.  Typically the longer the Bull Market, the longer the Bear market.  These extreme Bear Markets tend to last longer to correct the excess that was created in the previous run up.

I’ve studied every Bull and Bear market all the way back to and including the Panic of 1907.  One of the conclusions that I realized is the depth and severity of Bear Markets is really dependent on how bad the US and World economies are and other political factors that would impede future growth.  Examples; Bear Markets of 30% or more such as 1929 (The Great Depression), 1937, 1940-42 (World War II) 1969-1970 (During the Vietnam war) 1973-74 (OPEC oil price increases) 1977 (Higher interest rates, inflation and the Soviet Union Cold War escalation) 2001-2003 (.Com bubble burst) and 2008 (Housing Crisis, Sub-Prime Mortgage disaster).

Never get discourage, the new leaders are building to lead us higher.  If you get discouraged, you will miss the eventual next new powerful Bull market.

During these down periods and corrections in our economy, take advantage of Dollar Cost averaging and even adding more money to your Mutual Funds as the prices decline.  You can learn more about this in my Free Email Course.

Bear Markets create fear, uncertainty and a major loss in confidence.  The news will be horrible, “the world is coming to an end, and this is the end of Capitalism and our economy”.  This will be on the nightly news, newspapers and magazines covers.  When you start to see this everywhere, it’s usually the bottom of the market and the economy is ready to grow again.  Remember when I explained how the markets goes down and gets rid of the weak investors?  When there is no one left to sell and cause the prices to go lower, the market must go up which sucks people back in and drives prices higher.  It happens every time.  Cycle after cycle, year after year, decade after decade.

As the economy starts to grow again and the market starts it progress up again, no one is paying attention because the business news is so bad and everyone is still licking their wounds from the drop in prices that has taken place.  Everyone is still in disbelief.

The stock market will lead the economy.  Remember this, the market looks ahead 6-9 months, it is the leading indicator of our economy.  The news our economy is getting better or worse comes after the markets anticipates it.  Wall Street calls this “discounting the future”. 

Most people, including professionals miss key market turning points because they wait for better economic numbers and reports but the market anticipates these changes before they are reported.  This is why the market goes up before the good news starts and the markets go down while all the reports are happy and glorious, then wham, the markets are down and 3-6-9 months later the number come out that we are slowing, we have inflation, lower corporate profits etc.

By the time the news is good again, the market has typically moved higher for the last 6 months or more.

Over the last 100 years, the market has gone through 29+ Bear Markets, this is natural and normal.  This corrects the previous over expansion, inflated prices but every single time, the market regains momentum, starts to grow again and soars back to new higher ground.  Again, do not get sidetracked, depressed or discouraged; the next Bull market is not far away.

  If you are going to create wealth, make money in the stock market, you have to know market history so you have the faith and courage to sit through these normal Bear cycles.  It may feel like the end of the world but trust me, it will pass and your fund will recover and move higher once again. 

Pro Tip:  Markets are hardly ever wrong, people and opinions are usually wrong.

Until next week, hit me up with any questions or topics you’d like to cover in the future,

Welcome to the Nerdery,

Chad