Cycles are everywhere: seasons, the moon, laundry… etc etc etc. Cycles exist in business too! The business cycle, simply put, is the way the economy naturally goes up and down over time. Think of it like seasons—there are periods of growth (like spring and summer) and periods of slowdown (like fall and winter).

Understanding this cycle, and more importantly, knowing where we are in it, will help you understand what to invest in and when. This is especially key right now because a major component of the business cycle shifted: interest rates.

First, where are we now?

Hardest question first huh? Hate to break it to you, but outlining where we are in the business cycle is frankly beyond the scope of this newsletter because it’s something you can only see in retrospect. However, there are a few key points worth mentioning:

• Interest rates are dropping around the world

• Interest rates have been high for a few years, up to their highest since 2001

• Economies appear to be growing, with global growth projected to be around 3% for the next couple of years

• Unemployment is low but has been increasing slightly up to 4.2% from a recent low of 3.4% in the U.S.

So, all things considered, this looks pretty good. Where are we in the business cycle? Let’s look at the different phases of the business cycle to figure it out.

1. Expansion: The good times

• What happens: During expansion, the economy is growing. Companies are making more products, hiring more workers, and people are spending more money. Unemployment is low, and things feel pretty great.

• Interest rates: To keep this growth going, central banks (like the Federal Reserve) usually keep interest rates low. This makes borrowing money cheaper. Businesses take out loans to grow, and consumers (like you and me) borrow to buy things like houses and cars.

• Why it matters: Low interest rates mean it’s easier for you to borrow money and spend, which helps the economy grow. However, if this growth goes too fast, it can lead to rising prices (inflation).

• Where to invest: Stocks perform well in this period, particularly things like banks, luxury goods, and technology.

2. Peak: The high point

• What happens: At the peak, the economy is at its strongest, but it’s also when things start to overheat. Demand for products is super high, but companies might struggle to keep up. This can cause prices to rise too fast (inflation).

• Interest rates: To slow things down and keep prices under control, central banks raise interest rates. Higher rates make borrowing more expensive, which encourages people and businesses to spend less.

• Why it matters: When interest rates go up, loans for homes, cars, or credit cards become pricier. You might start thinking twice about borrowing or spending, which helps cool the economy down.

• Where to invest: As investors get greedy, the riskiest stuff performs best - think the stock of very small companies or crypto. But, be careful! The risky investments go down just as much (and often more) as they go up.

3. Contraction: The Slowdown

• What happens: After the peak, the economy starts to shrink. Companies cut back on production, some people lose jobs, and consumers spend less. This phase is called a recession, and it’s when the economy feels like it’s going in reverse.

• Interest rates: To help the economy recover, central banks lower interest rates again, making it cheaper to borrow money. The idea is to get people spending and businesses investing again.

• Why it matters: Lower rates mean you can borrow money at cheaper rates, which helps restart spending. The goal is to shorten the recession and encourage more growth.

• Where to invest: Bonds and other low-risk investments usually perform best during the contraction phase. Gold, as a store of value, also tends to perform better compared to higher-risk stuff.

4. Trough: The turning point

• What happens: The trough is the low point of the cycle, but it also means the worst is over. The economy stops shrinking, and things start to look more stable. It’s the point right before things begin to grow again.

• Interest rates: Interest rates usually stay low during this phase to give the economy a boost and help speed up recovery.

• Why it matters: With low interest rates, businesses and consumers are encouraged to spend more, which leads the economy back into the expansion phase and the cycle begins again.

• Where to invest: Get back in stocks! They will have fallen in price. It may be a scary time to invest, but that’s usually when you can find the best deals.

Okay, seriously, where are we in the business cycle?

I said we wouldn’t say! But fine, whatever, I’ll tell you. Interest rates are going from high to low, which is a good thing. That should stimulate growth. Growth is already pretty good, as mentioned earlier. Unemployment is low, even though it’s been increasing lately. 

To me, all these things say that we’re in the expansion phase of the business cycle. Especially with interest rates now dropping, we should see growth continue to accelerate and stocks continue to rise. But, inevitably, we will get to a point where the economy overheats and takes a dive. So if you’re thinking about investing, it’s probably a good time, but watch for signs of the overheating economy as we reach the peak!

The circle of life (and business)

The business cycle is like a roller coaster with ups and downs, and interest rates are the brakes or gas pedal that help control the speed of the ride. Low interest rates help the economy grow by making borrowing cheaper, while high rates slow things down to prevent overheating. Understanding these phases can help you make smarter decisions about your own finances—whether it’s borrowing money, investing, or just keeping an eye on what’s happening in the economy.

So, the next time you hear about the economy expanding or a recession coming, you’ll know what it means—and how interest rates are playing a part!