The Market Cycles of Your Lifetime (Ch. 2)
Three Charts within the Economic Cycle
Three charts within the Economic Cycle (which are within the Market Cycle
The curve of the Market Cycle looks like the safest and most predictable curve since it clearly shows one upward trend followed by one downward trend. Zooming into the Market Cycle are the Economic Cycles. These Economic Cycles occur periodically and demonstrate mini cycles of growth and contraction. One indicator on how to monitor Economic Cycles are to track index funds.
An index fund tracks a portfolio of stocks based on the criteria of the index. The $DJI index is comprised of the top 30 largest US companies. As you can see from Chart 1, there are more upward and downward trending curves throughout the history of an Index Cycle. (Note: The curvatures of an Index Cycle are closely-related to an Economic Cycle. While Economic Cycles include the activity of government revenue and expenditures, the Index Cycle features only private companies.)
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Chart 1. Historical chart of $DJI starting in Jan 1971.
Inside the Index Cycle are the individual businesses that experience their own growth and contraction.
Johnson & Johnson’s is a company that has been around longer than the $DJI index. It was established in 1886 and became an official Dow Jones company in 1997.
The chart below is a 10-year historical chart on the business cycles of Johnson and Johnson. As you see, there are more curves in the Business Cycle than the $DJI index cycle.
Chart 2. 10-year historical chart of Johnson & Johnson (JNJ 0.00)
And if we look at a historical chart of the last 6-months (below), we see even more curves. The upward trending curves represent business growth and downward trending curves represent business contraction.
Chart 3. 6-month historical chart of Johnson and Johnson (JNJ 0.00)
Business Cycles to a Market Cycle.
Let’s reverse engineer the cycles. At the most micro-level of cycles are Business Cycles, where individual companies grow and contract. Adding one company business cycle onto another company business cycle and doing this multiple times creates a portfolio of companies. These companies adhere to the portfolio’s criteria, as in the case of the Dow Jones Industrial Average which tracks the 30 largest companies in the US economy. This forms an Index Cycle.
Adding government revenue and expenditures to other global indices like the Dow Jones Industrial Average Index, or Japan’s Nikkei 225, or Mexico’s IPC Mexico, or London’s FTSE 100, or Czech Republic’s Prague Stock Exchange, together these indices begin to form Economic Cycles. The growth and contraction of the economy during this cycle is not as frequent as the Index Cycle, but more frequent than a Market Cycle.
A Market Cycle includes one single boom and one single bust. These cycles are what investors will experience in their lifetime and each market cycle presents an opportunity to grow wealth.
The concentric circles of cycles, or Market Concentricity.
In Chapter 3, learn how to manage investments through a Market Cycle. Every cycle features unique assumptions and objectives. In Cycle 1, where an individual begins to earn money and contribute to the economy, the objectives are less risky because there is less at stake. As oppose to when an individual is in Cycle 3, then the risk is higher because there is more at stake.
Managing Money Through the Four Cycles (Preview)
Read Chapter 3. Managing Money through the Cycles.
The Market Cycles of Your Lifetime
Chapter 1 — Enter the Market Cycle
Chapter 2 — The Economic Cycles within the Market Cycle
Chapter 3 — Managing Money Through the Cycles