Cycles, and why forecasts fail
Economies grow, slow, shrink and recover. Markets move through these cycles too, but usually earlier, and nobody times them reliably.
The cycle
Growth brings more jobs and spending, then often rising prices and rates, then a slowdown. A recession is a broad fall in activity lasting months. Then it recovers. No two cycles last the same time.
Dated afterwards
In the euro area a committee of economists dates recessions, months after they start and end. While you live through one, you rarely know for sure where you are in it.
Markets run ahead
Share prices tend to fall before a recession is announced and to recover before it ends, because they price what people expect. By the time the news is bad, much of the fall has often happened.
Forecasts
Forecasts of recessions are often wrong in both directions. A plan that works without knowing the next turn, with a mix you can hold, is sturdier than one that needs a forecast to be right.
Key takeaways
- Cycles are normal and uneven.
- Markets usually turn before the economy does.
- A plan that needs no forecast is sturdier.