Market cycle

Market cycle

The period between the two latest highs or lows of the S&P 500, showing net performance of a fund through both an up and a down market. A market cycle is complete when the S&P is 15% below the highest point or 15% above the lowest point (ending a down market).

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Market cycle. A market cycle is the movement from a period of increasing prices and strong performance, or bull market, through a period of weak performance and falling prices, or bear market, and back again to new strength.

Cycles recur periodically, though not on a predictable schedule. The length of each full cycle, and each phase within it, varies from several months to several years. The top of a cycle is called a peak and the bottom a trough.

A market cycle generally runs ahead of the concurrent economic cycle. For example, investors begin to sell stocks because they anticipate a recession, or turn bullish in the early stages of a recovery.

However, not all sectors of a market operate on the same schedule. For example, some stocks, such as utilities, have historically prospered in the downward phase of the stock market cycle when most other stocks have underperformed.

Similarly, the stock market tends to operate on a different cycle than the bond or commodities markets. These overlapping but distinct cycles are the basis of the investment strategy known as asset allocation.