Why investors need to understand the market’s cycles

Attempting to make sense of the stock market becomes a little easier when you admit 2 things:

1. Everything is cyclical.
2. Those cycles have less to do with economics and more to do with the stories people believe and the narratives they latch onto.

In the last 2 years, we’ve gone from the biggest economic crisis since the Great Depression to a stock market that surged to all-time highs, to the worst start-of-the-year period for stocks since the Great Depression.

There’s a long history of these cycles

In general, they follow a similar path — boom to bust to boom again, over and over. This results in a shock cycle of investors’ moods that goes something like this:

• Assume good news is permanent.
• Ignore bad news.
• Deny bad news.
• Panic at bad news.
• Accept bad news.
• Ignore good news.
• Deny good news.
• Accept good news.
• Assume good news is permanent.

Right now…

… we’re probably somewhere between panicking at bad news and accepting bad news. Inflation is causing havoc, but few are in denial about it anymore.

Before long, the cycle will turn again.

When is impossible to know, but the inevitability is almost certain. And when you understand the cycles, they become less confusing, less scary, and more exciting.