Signals to Look for During a Business Cycle

A business-cycle peak. Typically, earnings are high and unemployment is low at a peak. When prices for raw materials rise and inventories start to increase, look for a downturn to follow.

A bull market. A bull market is characterized by rising price-to-earnings (p/e) ratios and falling yields. In its late stages, a bull market may see high initial public offering (IPO) activity, rampant speculative buying, and outperformance from small-cap stocks. A market that seems indifferent to good news and shows a strong concern over interest rates may be at its top. Because the stock market usually anticipates the business cycle, it may begin to slide even as good earnings are still being reported.

A bear market. A bear market is characterized by rising yields, falling p/e ratios, and sharp declines with heavy trading volumes. A market bottom, however, may be marked by indifference to bad news, sluggish performance, and widespread pessimism. Upturns are often gradual and imperceptible. If the market anticipates the business cycle, earnings may continue to be weak for some time.