What is the Business Cycle?
The business cycle describes the natural fluctuation of economic output between periods of growth (expansion) and decline (contraction). A complete cycle consists of four phases: expansion, peak, contraction, and trough. By the NBER business cycle dates, US cycles from 1854 to 2020 averaged about 41 months of expansion and 17 months of contraction; for 1945 to 2020 the averages were about 64 and 10 months.
Sector Rotation and the Business Cycle
Sector rotation pairs each phase with the sectors thought to fit it: cyclical stocks such as technology and consumer discretionary in early expansion, commodities and energy in late expansion, and defensive sectors and high-quality bonds in contraction.
Key Considerations
Business cycles are identified with certainty only in hindsight. The NBER sets recession start and end dates after the fact, months after they occur.