The economic cycle, also known as the business cycle, describes the natural fluctuation of the economy between periods of growth (expansion) and decline (contraction). It consists of four main phases:
Expansion: The economy grows, employment rises, consumer spending increases, and businesses prosper.
Peak: Economic activity reaches its highest point before beginning to slow down.
Contraction: Economic growth slows, unemployment rises, and spending decreases. A prolonged contraction becomes a recession.
Trough: The economy reaches its lowest point before recovery begins.
Understanding the economic cycle helps investors make better decisions. During expansions, growth stocks tend to perform well. During contractions, defensive stocks and bonds may offer better protection. The cycle is influenced by government policies, interest rates, and global economic conditions.