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. Since 1854, US business cycles have averaged roughly 56 months of expansion followed by 17 months of contraction, though recent cycles have featured longer expansions.
Sector Rotation and the Business Cycle
Different asset classes and sectors perform best at different phases of the cycle. Early expansion favors cyclical stocks like technology and consumer discretionary. Late expansion benefits commodities and energy. During contraction, defensive sectors and high-quality bonds outperform. Understanding where the economy sits in the cycle helps investors tilt portfolios toward sectors with historical tailwinds.
Key Considerations
Business cycles are identified with certainty only in hindsight. The NBER often declares recession start and end dates months after they occur. Relying too heavily on cycle timing can lead to costly mistakes. A diversified, long-term approach with modest tactical adjustments is more reliable than aggressive sector rotation.