The phases of the business cycle

The eighth financial cycle since 1955. I spent most of my professional life studying financial cycles and how they impact the stock market, commodities and interest rates. The book that will be published in early 2001 gives the framework and the logical connection between the variables I consider important. The Internet version of this advisory provides you with the updated charts and the discussion of these indicators.

What is the likely direction of the financial markets? In order to answer this question it is useful to recognize that there are 6 phases in a complete financial cycle. Each phase is characterized by the position of various indicators as follows:

Phase 1
• Liquidity and stock prices bottom and then rise.
• The economy is weak.
• Inflation, commodities and interest rates decline.

Phase 2
• Liquidity and stock prices rise.
• The economy begins to improve.
• Inflation, commodities and interest rates decline.

Phase 3
• Liquidity and stock prices rise.
• The economy remains strong.
• Inflation, commodities and interest rates bottom and then rise.

Phase 4
• Liquidity peaks and the stock market becomes volatile and selective.
• The economy remains strong.
• Inflation, commodities and interest rates rise.

Phase 5
• Liquidity continues to decline and the stock market remains volatile and selective.
• The economy begins to slow down.
• Inflation, commodities and interest rates rise.

Phase 6
• Liquidity continues to decline and the stock market remains volatile and selective.
• The economy continues to slow down.
• Inflation, commodities and interest rates peak and then decline.

Phase 6 sets the stage for Phase 1, and the financial cycle begins all over again.

(This analysis appeared in the issue of 11/29/2000 of The Peter Dag Portfolio)

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked second best gold timer by Timer Digest

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