“The four most dangerous words in investing are: This time it’s different”
– Sir John Templeton
The business cycle is among the most reliable recurring patterns. It can be decomposed into four distinctive stages. These are early-, mid-, and late-cycle before a recession resets the pattern. Evidence-based research revealed distinctive performance characteristics across asset classes and cycle stages. Equities typically corrected before and during recessions. The late-cycle period is characterized by strong consumer spending and business investment. Interest rates are driven up by demand during that period and typically peak during the late-cycle as the economy runs at or near full capacity utilization. Meanwhile, the labor market is strong and inflationary pressure builds up as workers are confident with their bargaining position. These are just a few examples of fundamental regularities that are statistically significant.
Housing and precious metals seem to progress along a different cycle. Both fluctuate within secular swings, which oscillated around long-term trends. Housing displayed a negative serial correlation on a generation time frame. Precious metals witnessed sharp swings during relatively short time-frames.
All in all, reliable historical data does not only reveal long-term swing characteristics within cycles. It also reveals that the rhythm of cycles fluctuated in regular patterns.