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How should you respond to market cycles?

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Edward Jones - Chad Choate, AAMS

Posted on

Jul 25, 2024

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Florida - Sarasota, Bradenton & Charlotte Counties

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The movement of the financial markets can seem mysterious — and yet, if we look back over long periods, we can see definite patterns that consistently repeat themselves. As an investor, how should you respond to these market cycles?

To begin with, it’s useful to know something about the nature of a market cycle and its connection to the business or economic cycle, which describes the fluctuations of the economy between periods of growth and contraction. Issues such as employment, consumer spending, interest rates and inflation can determine the stage of the business cycle. On the other hand, the market cycle refers to what’s happening in the financial markets — that is, the performance of all the different types of investments.

The market cycle often anticipates the business cycle. In other words, the stock market may peak, or hit bottom, before the business cycle does the same. That’s partially because the financial markets are always looking ahead. If they foresee an event that could boost the business cycle and help the economy, such as the Federal Reserve lowering interest rates, they may become more “bullish” on stocks, thus driving the market up. Conversely, if the markets think the business cycle will slow down and the economy will contract, they may project a decline in corporate earnings and become more “bearish” on stocks, leading to a market drop.

Once you’re familiar with the nature of market cycles, you won’t be surprised when they occur. But does that mean you should base your investment strategy on these cycles?

Some people do. If they believe the market cycle is moving through a downward phase, they may try to cut their perceived losses by selling stocks — even those with strong fundamentals and good prospects — and buying lower-risk investments. While these “safer” investments may offer more price stability and a greater degree of preservation of principal, they also won’t provide much in the way of growth potential. And you’ll need this growth capacity to help reach your long-term goals, including a comfortable retirement.

On the other hand, when investors think the market cycle is moving upward, they may keep investing in stocks that have become overpriced. In extreme cases, unwarranted investor enthusiasm can lead to events such as the dotcom bubble, which led to a sharp market decline from 2000 through 2002.

Rather than trying to “time” the market, you may well be better off by looking past its cycles and following a long-term, “all-weather” strategy that’s appropriate for your goals, risk tolerance, time horizon and need for liquidity. And it’s also a good idea to build a diversified portfolio containing U.S. and foreign stocks, mutual funds, corporate bonds, U.S. Treasury securities and other investments. While diversification can’t protect against all losses, it can help protect you from market volatility that might primarily affect just one asset class.

Market cycles often draw a lot of attention, and they are relevant to investors in the sense that they can explain what’s happening in the markets. Yet, when it comes to investing, it’s best not to think of cycles but rather of a long journey – one that, when traveled carefully, can lead to the destinations you seek.

Chad Choate III, AAMS
828 3rd Avenue West
Bradenton, FL 34205
941-462-2445
chad.chaote@edwardjones.com

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Edward Jones, Member SIPC

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Edward Jones - Chad Choate, AAMS

Financial Services 828 3rd Ave. W., Bradenton, Florida, 34205

Hello, I'm Chad Choate a dedicated financial advisor in Bradenton, FL, I began my career with Edward Jones in 2017. As a financial advisor, I want to find out what's important to you and help you build personalized strategies to achieve your goals. As a lifelong Manatee County resident, I graduated from the University of South Florida and was a teacher in Manatee County before joining Edward Jones. My driving force is to change people's lives in a positive way, and what better place than my home to do that. Whether you're planning for retirement, saving for college for children or grandchildren or just trying to protect the financial future of the ones you care for the most, we can work together to develop specific strategies to help you achieve your goals. We will also monitor your progress to help make sure you stay on track or determine if any adjustments need to be made. Throughout it all, we're dedicated to providing you with top-notch client service. But we're not alone. Thousands of people and advanced technology support from our office can help ensure you receive the most current and comprehensive guidance. In addition, we welcome the opportunity to work with your attorney, accountant and other trusted professionals to deliver a comprehensive strategy that leverages everyone's expertise. Working together, we can help you develop a complete, tailored strategy to help you achieve your financial goals. I currently volunteer with the Manatee Hurricane football Broadcast and Booster Club, serve on my church's trustees council and have previously served as a leader in Young Life. I am a member of the Manatee Chamber of Commerce and an alumnus of their Leadership Manatee program. I have been married to my childhood sweetheart, Ashley, for 15 years and we have a son, Wesley, and daughter, Camryn. We enjoy watching our children play their sports and traveling as a family.

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