Investment market cycles

Some of the information in this article may be out of date. We are currently in the process of updating our content to reflect FY26 details.

Updated 26 November 2020

With one of the most incredible years of our lives nearly behind us, we invite you to watch our recent webinar held by renowned asset consultant, Tim Farrelly and head of the First Financial Investment Committee, Graeme Quinlan.

In the session, we took a look back at the challenges 2020 posed and how we navigated them. More importantly, we looked at the uncertain road ahead and how we should position ourselves for success beyond 2020.

Investment markets are cyclical in nature. Ups and downs occur regularly, but over longer periods of time, there are recognisable traits associated with each stage that can be clearly categorised.

Understanding these normal investment cycle stages can be helpful in reducing the rollercoaster of emotions you can experience during market volatility.

Fluctuating investment balances can be unnerving, but once you understand the drivers behind the movement, you can minimise your anxiety and maintain your focus on your long-term financial goals.

This year we have seen significant swings in the market, accompanied by increased uncertainty, so today we want to share our insight into how investment market cycles work.

An investment market cycle is usually separated into five distinct stages. It’s often hard to pinpoint the exact beginning or end of a cycle until it is complete, and there can be industry conjecture during transitions… but this is the most common sequence.

Top of the market or ‘peak’ – at the peak of the cycle, investment prices are at their highest. It usually follows a period of strong growth and high investor confidence. Low unemployment and falling interest rates are common traits; however, the risk of recession is apparent. Investor behaviour can vary during this stage – some are overconfident and end up ‘buying high’, where others start to think about selling. Predicting a market peak is extremely challenging, but it is easily identified when it has passed.

Bear market conditions – once over the peak, the cycle moves into bear market conditions. The economy faces a downturn and may experience a recession. Stock prices fall and company profits decrease. Bear market conditions are technically identified by an asset price fall of 20% or more and negative investor attitudes. Eras such as the Great Depression and the Global Financial Crisis are representative of this stage in the investment market cycle. It is important for investors to maintain a long-term perspective during this phase, as moving assets to cash or other defensive strategies could impact the potential for future wealth building.

The bottom of the market or ‘trough’ – the bottom of the market is often the most difficult for investors to navigate as it tends to be emotionally taxing. Stock prices are low and it can be extremely disheartening to see a drop in investment balances, but there is often significant investment opportunity during these times. Savvy investors can find value, and history demonstrates that market rebounds can produce positive results.

Market rebound or ‘upswing’ – during the market rebound, the outlook begins to improve. Investors are attracted to low prices and the economy starts to bounce back. Corporate profits are again on the rise and the cycle starts to enter its next bull market. This stage can vary significantly in length… anything from weeks to months or even years.

Bull market conditions – prior to 2020, investors enjoyed over a decade of bull market conditions. Continued economic growth, increasing stock prices, robust company profits and strong investor confidence are typical characteristics of this phase. This stage is attractive to investors as they recognise the potential of higher earnings. But some investors take this too far and chase profits rather than maintaining a well-diversified portfolio. This can put them at risk when the next cycle movement occurs.

Here at First Financial, our unique Investment Philosophy is designed to withstand volatility and can endure market downturns. By separating a client’s portfolio into three investment buckets, we ensure growth investments do not need to be sold in the downward part of the investment cycle, and portfolios regain their value when the market recovers.

Graeme Quinlan, Senior Adviser and head of our Investment Committee, says,

“Our philosophy structure is built for uncertainty… in the long-term when things recover, portfolios that are set up in alignment with our philosophy almost inevitably come through stronger.”

Our professional advisers are here to help you navigate the ups and downs to make sure you stay focused on long-term results. They can provide you with a valuable sounding board when you are concerned about market conditions.

We offer strategic advice that will benefit you long into the future. If you want to speak to a financial adviser about the current market cycle, please contact our team today. Read another investments article.