ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Stock Market Timing Based on the Economic Cycle

Updated on May 29, 2018
Rock_nj profile image

I have been involved in trading and in investing in stocks for four decades. I enjoy learning and writing about financial topics.

One of the simplest ways to time the stock market is by trading in and out of the stock positions based on the overall economic cycle. While this may not be a timing method that one can use often, it can reap big rewards if done correctly as the economy eventually goes through a recession and then recovery from time to time. The thing that makes this market timing method relatively simple is that you just have to follow the overall economic conditions for cues as to when to get out and get back into the stock market. But, it is not quite that simple. Based on historical stock market performance going into and during recessions, there are key points in the economic cycle that are the best time to sell stocks and the best time to buy back stocks.

Time The Stock Market By Understanding The Four Stages The Economy Cycles Through

Stock Market Timing Using The Economic Cycle

The performance of the stock market is remarkably predictable during the economic gyrations known as the economic cycle. The economy does not expand forever. Economic expansions eventually come to an end and turn into economic contractions, which is commonly called a recession. Let’s take a look at the four stages of the economic cycle as it relates to stock market performance and how to maximize gains by getting into and out of stocks at the right times.

Stage 1 (Sell Stage) - The economy is well into an economic recovery and you have been holding your stocks for years watching them appreciate in price along with the overall stock market. The Federal Reserve is worried about inflation pressures overheating and causing too much inflation, and therefore raises short-term interest rates and reduces money supply to slow the economy. The yield curve inverts (meaning short-term rates are higher than long-term rates) and the stock market eventually makes a top within eighteen months of the yield curve inversion. It is during this eighteen months that you want to sell stocks and move money into cash or safe interest-bearing investments. The Federal Reserve’s high-interest rate policy eventually causes a recession to begin as Stage 1 comes to a close, and the stock market selloff commences.

Stage 2 (Buy Stage) - The economy is in a full-blown recession and the stock market is selling off in response to bad economic news and poor corporate earnings reports. During most recessions, the stock market sells off at least twenty percent, but sometimes it sells off much more than that (up to eighty percent). The Federal Reserve increases the money supply and lowers interest rates to help the economy dig out of the recession. There is a critical point during Stage 2 when the stock market bottoms and it is a very good time to buy stocks. The time to buy stocks is when the economic indicators have reached a bottom, about midway through a recession. This means that economic indicators such as unemployment stop getting worse. The stock market usually rallies strongly once a recession has reached a bottom, in anticipation of an eventual economic recovery.

Stage 3 (Hold Stage) - The economy is in the recovery mode recession, as it climbs out of the recession trough and economic growth resumes. The Federal Reserve continues its low-interest rate and generous money supply policies to help the economy recover. The stock market makes large gains during Stage 3. Money from the sidelines comes back in and new money is put to work to help the stock market rise, as the economic indicators show growth has resumed. It is important to be holding stocks during Stage 3 to reap the benefits of the rising stock market.

Stage 4 (Hold Stage) - The economic expansion continues with variable but positive growth. The Federal Reserve starts to raises short-term interest rates to counter rising inflation pressures that go along with an economic recovery. The stock market continues to generally rise during Stage 4 as economic numbers and company earnings reports are good, with the typical corrections along the way. This is a time to hold onto stocks to reap the gains in the stock market and look for indications that the economy is entering Stage 1 to prepare to time the stock market during the next recession.

Remember, timing the stock market using the economic cycle does not work unless you keep track of the condition of the economy and whether the Federal Reserve has inverted the interest rate yield curve by raising short-term rates to a point that it signals a looming recession and a stock market selloff. It is also important to be patient and act when the indicators tell you to act, no sooner and no later. Most of the long-term gains made in the stock market are made during a few big rally days that occur from the middle of Stage 2 through Stage 4, as the recovery economy drives stock prices higher. If you are sitting on the sidelines when those big stock market rally days happen, then you will miss out on the gains.

If stock market timing is not for you, there is nothing wrong with using a diversified buy and hold stock investing strategy. Instead of timing the market by selling and buying back into stocks, just hold stocks and increase your holdings when the stock market is down during the first half of Stage 2.

S&P 500 Index Performance With Recessions Included

A graphical depiction of the S&P 500 Index performance over decades with recessions included as grey bands.
A graphical depiction of the S&P 500 Index performance over decades with recessions included as grey bands. | Source

Stock Market Timing Methods Are Not Designed To Get You Out of and Into The Stock Market at Exact Market Tops and Bottoms.

Understanding Stock Market Timing

The concept of stock market timing is not well understood. It is important to understand what it is if you wish to use a timing method successfully. Market timing methods like the one outlined in this article are not designed to and will not get you out of and into the stock market at exact tops and bottoms. Rather, they provide guidance regarding when conditions are favorable and not favorable to hold stocks. With historical performance as a guide. the conditions should eventually cause the stock market to move in a particular direction, either up or down. But, it may take some time for these moves to materialize. Some serious traders and investors use many market timing methods and indicators to verify when to hold stocks and when to wait on the sidelines in cash.

Stock Market Timing By Economic Stage Poll

Do You Think Timing The Stock Market Based On Economic Conditions Make Sense?

See results

How Do the Stock Market and the Economy Interact?

© 2018 John Coviello


    0 of 8192 characters used
    Post Comment
    • Rock_nj profile imageAUTHOR

      John Coviello 

      8 months ago from New Jersey

      Warren Buffet times the market himself. He was buying stocks and investing in companies like crazy during the Great Recession of 08/09. He knew that an economic downturn was the time to buy because the economic cycle and the stock market always turn up over time. Since then, not so much because valuations have reached high levels. The Buffet Indicator that divides the value of the stock market by the GPD of the U.S. is at extremely high levels now.

    • Rock_nj profile imageAUTHOR

      John Coviello 

      8 months ago from New Jersey

      Actually, you can know. Recessions don't last forever. Historically, they are much shorter than economic expansions. Typically lasting 18 months. You can see the bottom of a recession being reached in job losses, the unemployment rate, unemployment claims, etc. If you're off by a few months, who cares? Just average in. The economy always reaches bottom and recovers, and the stock market recovers with it. The point is that the time to buy is before a recession ends because the stock market is forward-looking, and will have rallied a considerable amount off of its lows by the time the recession is declared over.

    • tsadjatko profile image

      8 months ago from now on

      “The time to buy stocks is when the economic indicators have reached a bottom, about midway through a recession.”

      And you know when the indicators have reached a bottom? Nobody knows that except in hindsight, and the same with when to get out. Unless you can be right everytime without fail you can’t know if any time you are right it was just coincidence or your methodology was the reason.

    • tsadjatko profile image

      8 months ago from now on

      Jack is right. Turns in the market typically come at a time of their own choosing and don't hold a news conference.

      Buffet says that if we aren't willing to buy and hold shares of a company for 10 years or more, we shouldn't buy it," says Ted Snow, founding principal of the Snow Financial Group in Addison, Texas. "This is so because over time, the market takes care of us. If we buy good companies and hold them, we should be compensated."

      He adds: "Market timing only makes the brokerage house rich and deflates what 'success' the day trader had. It is a fool's game."

      I think your title for this article is a bit misleading. Entering the market based on the economic cycle is a sound way to invest but when you say timing the market it conjures up the notion of trading in and out which may work for a while then fail, because no one can predict the future. We can only learn from the past and the past proves the best way to invest is to buy diversified investment grade stocks (not to exclude growth stocks) and hold for the long term. History shows us that over any 20 year period the stock market has outperformed all other investments. The best strategy is to have a long term goal and whenever the market corrects add more money and keep buying while it is down because bear markets don’t last that long compared to bull markets. Getting out before a correction and getting back in sounds great but the economic cycle is not always in sync with the market and especially today with all the advanced hedge fund electronic trading methods and international finance even the top professionals will tell you trading the market can be a crap shoot and it is a full time job. If your strategy is long term, buy more when the market is down, you don’t have to be analyzing anything much all the time.

    • jackclee lm profile image

      Jack Lee 

      8 months ago from Yorktown NY

      There is no market timing strategy that works. If there were, we would all be millionaires. The reason the market is the way it is, is its unpredictability. When a correct occurs, it is usually very abrupt and there is little advanced notice. The better strategy is to invest in SPY and over the long term, your money will grow and don’t panic sell.

    • Larry Rankin profile image

      Larry Rankin 

      11 months ago from Oklahoma

      Very educational.

    • aesta1 profile image

      Mary Norton 

      11 months ago from Ontario, Canada

      The individual stocks have also its own cycle. Sometimes, when a growth stock reaches a plateau, it makes no sense holding on. As one experiences more trading in the stock market, one becomes more able to manage one's fear and greed so the selling and buying becomes more rational.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)