Free course · Economics · Beginner
Boom, Bust, Repeat: A Course on How Markets Cycle
The economy and the stock market both run in cycles, and they rarely turn together. A market cycles course that explains the gap, and gives you rules to act on without guessing the stage.
Who it is for
Investors and traders who want to understand why stock prices and the economy turn at different times, and what to do about it.
By the end you can
- Tell the business cycle apart from the market cycle and explain why they run out of step
- Show with a simple sum how prices can rise while earnings forecasts fall
- Read a credit spread and say what a widening one signals about lenders
- Write a rebalancing band that acts on the portfolio without naming the cycle stage
The lessons
- 01 Business Cycle and Market Cycle: Why They Run Out of Step
The business cycle and market cycle measure different things: output, jobs and profits on one side, prices set on expectations on the other.
About 12 minutes, with a quiz at the end
- 02 Why Stocks Lead the Economy at the Turns
Why stocks lead the economy: prices discount expected future earnings, so a changing multiple can lift a stock while earnings forecasts are still falling.
About 12 minutes, with a quiz at the end
- 03 Credit Spreads and Sector Returns Across the Economic Cycle
How credit spreads move through the economic cycle, how to measure a widening in basis points, and which sectors tend to lead or lag in each phase.
About 13 minutes, with a quiz at the end
- 04 Investing Through Market Cycles With Rules You Set Now
Investing through market cycles works best with rules written in calm markets, such as a target stock weight with a band that tells you when to rebalance.
About 12 minutes, with a quiz at the end
The economy and the stock market both go through booms and busts. Rarely at the same time. Stocks often fall while the economy still looks fine, and they can rally while layoffs fill the headlines, which makes the market look irrational right up until you see that prices are a bet on the next year while the economic data describe the last one. That gap, and what to do about it, is what the lessons cover.
Who it suits
Investors and traders who watch both the economic calendar and the market, and can’t square the two. You might hold a fund portfolio and wonder whether a slowdown should change it. Or you trade swings. Then you want to know why a strong jobs report can send stocks down on the day, and why a weak one sometimes sends them up, when the headline seems to point the other way.
No economics background is needed. Each idea is built from the ground up. The arithmetic is a few multiplications on hypothetical numbers.
What to have ready
Open a quote page for a broad index fund and an economic calendar side by side. One shows prices moving day to day, and the other lists the releases that describe the economy, each with its actual figure, the forecast and the previous reading. Then note your own portfolio’s current split between stocks and everything else. A rough figure is enough.
Keep a notebook open. The last lesson asks you to write a rule for that split.
How to work through it
Go in order. The early lessons build the idea that prices lead the economy, one sum at a time, and the later ones lean on it when they turn to bond markets, sectors and your own rules.
Each lesson ends with a short quiz. A wrong answer points to the section worth rereading. The second lesson carries the arithmetic of expectations, and it rewards a slow read with a pencil, since the rest of the course takes the result for granted.
What it leaves out
No forecasting models. You won’t find a recession probability model, a yield curve timing rule, or a checklist for naming the stage of the cycle in real time, since the course is built around acting well without knowing the stage, and the argument for working that way sits in the viewpoint on naming the cycle stage.
Bond trading and currencies get only the brief mention they need to explain credit spreads.
Where to go after
For the data side, Macro Weather for Stock Pickers walks through the releases that move markets and how rates, inflation and jobs work their way into company earnings, which picks up where the cycle lessons stop. Want practice? Risk-On, Risk-Off or Sit Tight? scores each decision on its reasoning. If the vocabulary gets muddled, correction vs bear market vs recession separates the terms. The economics hub collects the rest, from jobless claims to defensive stocks.
People also ask
Do stock markets always fall before a recession?
Often, and not always. Prices move on what investors expect, so they tend to turn before the economic data do, but the lead is irregular and some sharp falls happen with no recession following. Treat a falling market as a change in expectations and nothing more certain than that.
Can you time the market using the business cycle?
Nobody reliably can. Recessions are dated by the NBER well after they start, and prices usually move before the data confirm anything. What you can control is a set of rules for your own portfolio, written in advance, that act on what your holdings do.