Another important factor to consider when you are investing is in which stage of the business cycle we are. The six stages of the business cycle are:
During this stage, the economy is doing well as demonstrated by economic indicators like unemployment, income, wages, and both demand and supply of goods and services. Companies and people borrowing are able to pay back their debts and there is a lot of liquidity in markets allowing lots of investments.
In the second stage of the business cycle, the economy peaks. All the indicators that we mentioned before do not continue growing past this point and this is a turning point.
The economy starts to contract in this phase and is characterized by a decrease in demands of goods and services. All the different economic indicators start to fall and prices tend to fall.
If unemployment and therefore the disposable income continues to fall the economy enters a recession. The economy continues to decline and as it strays from the expected growth trajectory people tend to describe this as a depression.
This is the moment where the growth rate becomes negative and the economy starts contracting. The demand for goods and services reaches its lowest level.
Once again there is a turning point for the economy, but this time for the better. Demand starts increasing and there is a positive outlook for the future. Investment and supply react to this and starts growing once again. The economy returns to its steady state growth path.