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L.5 · BEGINNER · 2 MIN

The Business Cycle: Timing the Economic Seasons

The economy cycles through four phases: expansion, peak, contraction, and trough. Each phase creates distinct conditions for different investments.

Quiz · 5 questions ↓
§ 01
PhaseCharacteristicsBest Investments
ExpansionGDP grows, unemployment falls, earnings riseCyclicals: tech, consumer discretionary, financials
PeakGrowth slowing, inflation rising, Fed tighteningCommodities, energy, short-duration bonds
ContractionGDP falls, layoffs increase, earnings declineDefensives: utilities, healthcare, Treasuries
TroughWorst is over, early recovery signsDeep value, small-caps, high-yield bonds
§ 02
Look at the **Markets** view macro indicators. Based on current unemployment, GDP, and inflation data, which phase do you think we are in?
§ 03

You do not need to predict the exact turning point. Just recognizing which phase you are in helps you avoid the worst mistakes, like buying cyclicals at the peak.

§ 04
The 10-year / 2-year yield curve inverted 9 months ago. Stocks are at all-time highs, unemployment is 3.8%. What's the disciplined reading?
Five questions · AI feedback

Sit with the ideas.

The yield curve has been inverted for 8 months. ISM Manufacturing just dropped below 50. But the unemployment rate is still at below 4% and consumer spending is solid. Are we in a recession?

Why:

Other lessons in this course.

  1. 01Inflation: What It Is and Why It Matters
  2. 02The Fed and Interest Rates: How Policy Moves Markets
  3. 03The Yield Curve, in Plain English
  4. 04GDP: What the Economy Actually Produces
  5. 05The Business Cycle: Timing the Economic Seasons— reading now
  6. 06Fiscal Policy: Government Spending, Taxes, and Deficits
  7. 07The Fed’s Advanced Toolkit: QE, QT, and Forward Guidance
  8. 08Trade, Exchange Rates, and the Dollar
  9. 09Financial Crises: How Economies Break Down
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