stock market clock

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STOCK MARKET CLOCK

I joined the market in 1988. As like any seasoned investor, I learned as much as I could as quick as I could. It really helped when I learned about the stock market clock. The clock divides the economic cycle into four stages: reflation, recovery, overheat, and stagflation.

The actual market is always more complicated than theory, and sometimes the clock could move backward or skip a phase.

There is an actual stock market clock that divides the economic cycle into four stages:

reflation, recovery, overheat, and stagflation.

Each phase is comprised of the direction of growth and inflation relative to their trends.

Here's a breakdown of each phase.

Phase 1 – Reflation: Sluggish growth and low inflation. The economy is plagued by overcapacity and declining demand, which lowers commodity prices and pulls down inflation. The stocks are suffering in a bear market, but bonds are expected to be the most welcomed asset thanks to the generous monetary and fiscal support from governments and central banks (bail-out, cutting rates, and stimulus programs, which in my book, bail out and stimulus should never be allowed, that is a lot of our current prob. I'm good with rate cutting.)

Phase 2 – Recovery:Central bank easing is starting to drive growth above trend. Although growth is recovering, inflation remains weak as there is still excess capacity. Soaring growth and low level of inflation are the goldilocks phase of every economic cycle. Stocks are the most favorable asset class in this phase.

Phase 3 – Overheat: Growth peaks and slows down, and inflation is rising. Rising inflation spurs the central bank to hike rates, usually causing bond yields to increase. The bond market enters a bear market. At the same time, stocks become less attractive than in phase 2 in a rising interest rate environment. However, in this phase, the price of commodities rises apparently, making it the best asset class.

Phase 4 – Stagflation: GDP growth slows, but inflation is still high. Productivity is falling, and a wage-price spiral is developing as companies raise prices to protect compressing margins. This continues until a sharp increase in unemployment breaks the cycle. Central banks maintain high rates until they rule inflation, causing the yield curve to invert. At this stage, cash is the best asset.

The stock market clock is a simple yet helpful framework for understanding various business cycle stages. The theory suggests people invest based on the current stage of the economy.

It's a basic theory, especially for long-term investors who invest in stocks, ETFs, futures, commodities, and bonds.

However, the actual market is always more complicated than theory