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Home » » Understanding Economic Cycles in Fundamental Analysis

Understanding Economic Cycles in Fundamental Analysis

The economic cycle refers to a series of activities involving three main components: society (consumers), producers (companies), and trade (distributors). Understanding the economic cycle is beneficial for analyzing whether a company has reached its peak. This economic activity consists of three primary factors:

  1. Society (Consumers): The beneficiaries or recipients of goods or services produced.
  2. Companies (Producers): The producers of goods or services to meet consumer needs and wants.
  3. Trade (Distributors): Suppliers of goods or services that channel production outputs to consumers.

Economic Cycle

The economic cycle can be visualized as a wave of rising and falling economic activity, consisting of four main elements:

  1. Upturn (Expansion): Economic recovery is characterized by a rising economy. If this upward movement occurs consecutively for at least two quarters, it is termed an expansion.
  2. Peak: When the upward movement reaches its highest point, the economy will begin to decline after reaching this peak.
  3. Downturn (Recession): A decrease in output is evident from the decline in economic growth rates. If this decline persists for at least two consecutive quarters, it is referred to as a recession.

Duration of Economic Cycles

Each economic cycle has a specific period during which it experiences booms or depressions. The duration of economic cycles generally consists of three stages:

  1. Short-Term Cycle (Kitchin Cycle): Lasts about 40 months, identified by Joseph Kitchin in 1923. Factors influencing this cycle include customs and natural influences.
  2. Medium-Term Cycle (Juglar Cycle): Lasts between 7-11 years, discovered by Clement Juglar in 1860.
  3. Long-Term Cycle (Kondratieff Cycle): Lasts between 48 to 60 years, identified by Nicolai D. Kondratieff in 1925. Factors influencing this cycle are often related to discoveries and the application of new technologies.

Indicators for Analyzing Economic Cycles

When analyzing the economic cycle, several key indicators should be considered:

  • Economic Growth
  • Real Output

Economic cycles will not grow continuously; therefore, economic activity will experience fluctuating conditions. Understanding economic cycles enables us to minimize negative impacts and strive for stable and increasing cycle patterns.

Knowledge of the economic cycle is key in fundamental analysis. By comprehending the dynamics between society, producers, and trade, traders can make better investment decisions. Understanding economic cycles and related indicators is crucial for anticipating market changes and achieving consistent profits.

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