Glossary: Market Cycle Terminology

About This Glossary

This reference guide defines essential terms used in market cycle analysis and regime-based investing. Terms are organized into four categories: Cycle Phases, Economic Indicators, Market Regimes, and Investment Strategies. Cross-references to related articles in the Market Cycles and Regimes series are included where applicable.

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Cycle Phases

Bear Market: A decline of 20% or more from recent highs in a broad market index, typically accompanied by negative investor sentiment and economic pessimism. Bear markets have occurred approximately once every 3-4 years historically and last an average of 9-12 months.

Bull Market: A sustained period of rising asset prices, typically defined as a 20% or greater increase from recent lows. Bull markets last longer than bear markets on average, with the 2009-2020 bull market lasting nearly 11 years.

Business Cycle: The recurring pattern of economic expansion and contraction. A complete business cycle includes four phases: expansion, peak, contraction (recession), and trough. Average cycle length in the US has been approximately 5-6 years since World War II.

Contraction: The phase of the business cycle when economic activity is declining. GDP growth turns negative, unemployment rises, and corporate profits fall. Contractions typically last 6-18 months.

Cyclical Bear Market: A decline within a longer-term secular bull market. Cyclical bears tend to be shorter and shallower than secular bears. The 2011 European debt crisis selloff was a cyclical bear within the 2009-2020 secular bull.

Cyclical Bull Market: A rally within a longer-term secular bear market. The 2003-2007 bull market occurred within the broader 2000-2013 secular bear market and ended with the financial crisis.

Early Cycle: The period immediately following a recession trough when growth is accelerating from depressed levels. Early cycle typically favors economically sensitive sectors and higher-beta assets.

Expansion: The phase of the business cycle when economic activity is growing. GDP increases, unemployment falls, and corporate profits rise. Expansions have averaged 58 months since 1945.

Late Cycle: The period when economic expansion is mature, capacity utilization is high, and inflationary pressures may be building. Late cycle typically favors quality and defensive positioning.

Mid-Cycle: The period of steady economic growth between early acceleration and late-cycle overheating. Mid-cycle is typically the longest phase and often supports broad market participation.

Peak: The point of maximum economic activity in a business cycle, after which contraction begins. Peaks are identified retrospectively by the NBER, often 6-12 months after they occur.

Recession: A significant, widespread, and prolonged decline in economic activity. The NBER defines recessions based on depth, diffusion, and duration of the decline in economic indicators.

Recovery: The initial phase of expansion following a recession trough. Recovery is characterized by economic activity returning toward pre-recession levels but not yet exceeding them.

Secular Bear Market: A long-term period (10-20 years) of below-average returns, often characterized by range-bound prices and declining valuations. The 1966-1982 and 2000-2013 periods are examples.

Secular Bull Market: A long-term period (10-20 years) of above-average returns, characterized by rising valuations and persistent uptrends. The 1982-2000 and 2013-present periods are examples.

Trough: The point of minimum economic activity in a business cycle, after which recovery and expansion begin. Troughs mark the official end of recessions.

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Economic Indicators

Conference Board Leading Economic Index (LEI): A composite index of 10 economic indicators designed to forecast economic activity 6-9 months ahead. Includes jobless claims, building permits, stock prices, and consumer expectations.

Consumer Price Index (CPI): A measure of the average change in prices paid by urban consumers for a basket of goods and services. Core CPI excludes volatile food and energy components.

Credit Spread: The yield difference between corporate bonds and Treasury securities of similar maturity. Widening spreads indicate increased credit risk concerns; narrowing spreads indicate improving conditions. See "Using Risk-On/Risk-Off Dashboards."

Dr. Copper: The nickname for copper as an economic indicator, reflecting its widespread industrial use. Rising copper prices often signal economic strength; falling prices may signal weakness. See "Commodities as Cycle Signals."

Financial Conditions Index (FCI): A composite measure incorporating interest rates, equity prices, credit spreads, and exchange rates to assess overall financial conditions. The Chicago Fed and Goldman Sachs publish widely followed FCIs.

Gross Domestic Product (GDP): The total value of goods and services produced within a country's borders. Real GDP adjusts for inflation and is the primary measure of economic output.

Initial Jobless Claims: Weekly data on new applications for unemployment insurance. Rising claims indicate deteriorating labor market conditions; falling claims indicate improvement.

ISM Manufacturing PMI: A monthly survey of manufacturing purchasing managers indicating expansion (above 50) or contraction (below 50). Levels below 50 for multiple months often precede or coincide with recessions.

NBER: The National Bureau of Economic Research, a private nonprofit that serves as the official arbiter of US recession dating. The NBER Business Cycle Dating Committee identifies peaks and troughs.

Nonfarm Payrolls: Monthly data on the number of employed persons in the US, excluding farm workers. The most closely watched employment indicator, released by the Bureau of Labor Statistics.

Sahm Rule: A recession indicator developed by economist Claudia Sahm. It signals recession when the 3-month moving average of the unemployment rate rises 0.5 percentage points or more above its 12-month low.

Term Spread: The difference between long-term and short-term interest rates. Commonly measured as the 10-year Treasury yield minus the 2-year (2s10s) or 3-month (3m10s) yield. See "Yield Curve Inversions and Timing Lags."

Unemployment Rate: The percentage of the labor force that is jobless and actively seeking employment. A lagging indicator that typically peaks after recessions end.

VIX (Volatility Index): The CBOE Volatility Index measuring 30-day implied volatility on S&P 500 options. Often called the "fear gauge," with levels above 25-30 indicating elevated stress. See "Using Risk-On/Risk-Off Dashboards."

Yield Curve: A graph showing interest rates across different maturities for Treasury securities. Normal curves slope upward; inverted curves slope downward and historically precede recessions. See "Yield Curve Inversions and Timing Lags."

Yield Curve Inversion: When short-term interest rates exceed long-term rates, producing a downward-sloping yield curve. Inversions have preceded every US recession since 1955.

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Market Regimes

Backwardation: A futures market condition where near-term contract prices exceed longer-term prices. In commodities, backwardation often signals tight supply conditions.

Breadth: A measure of how many stocks are participating in a market move. Strong breadth (many advancing stocks) confirms uptrends; weak breadth (few advancing stocks) may signal vulnerability.

Contango: A futures market condition where longer-term contract prices exceed near-term prices. In commodities, contango often signals ample supply and weak demand.

Correlation Regime: A period characterized by particular correlation relationships between asset classes. During crisis periods, correlations often spike as assets move together.

Deflation: A sustained decline in the general price level, increasing the purchasing power of money. Deflationary environments favor cash and high-quality bonds.

Disinflation: A slowing in the rate of inflation without reaching deflation. Disinflation is often positive for financial assets if economic growth continues.

Flight to Quality: A market dynamic where investors sell risky assets and buy safe-haven assets during stress. Treasury bonds, gold, and the US dollar typically benefit from flight-to-quality flows.

High Volatility Regime: A period of elevated market volatility, typically with VIX above 20-25. High volatility regimes often coincide with negative returns and increased correlation between assets.

Inflation Regime: A period of sustained and elevated price increases. Inflationary regimes favor real assets (commodities, real estate, TIPS) and hurt nominal bonds.

Low Volatility Regime: A period of subdued market volatility, typically with VIX below 15-18. Low volatility regimes often coincide with positive returns and risk-on behavior.

Quantitative Easing (QE): Central bank purchases of securities to increase money supply and lower interest rates. QE regimes have supported asset prices by providing liquidity.

Quantitative Tightening (QT): Central bank sales or runoff of securities to reduce money supply. QT regimes may pressure asset prices by reducing liquidity.

Risk-Off: A market environment where investors favor safe-haven assets (Treasuries, gold, USD) over risky assets (equities, credit, emerging markets). See "Using Risk-On/Risk-Off Dashboards."

Risk-On: A market environment where investors favor risky assets over safe-haven assets. Risk-on regimes typically feature rising equity prices, tightening credit spreads, and dollar weakness. See "Using Risk-On/Risk-Off Dashboards."

Stagflation: An economic condition combining stagnant growth with elevated inflation. Stagflation is challenging for portfolios as both stocks and bonds may underperform.

Term Premium: The additional yield investors demand for holding longer-term bonds versus rolling over short-term bonds. Term premiums have been compressed in recent decades, affecting yield curve interpretation.

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Investment Strategies

Barbell Strategy: An allocation approach that combines safe assets (Treasuries, cash) with risky assets (equities) while avoiding intermediate-risk assets. Used to maintain optionality while accepting some risk.

Carry Trade: A strategy of borrowing in low-yielding currencies to invest in higher-yielding assets. Carry trades perform well in stable, risk-on environments and unwind during risk-off episodes.

Defensive Allocation: Shifting portfolio weight toward assets that historically preserve capital during downturns, including cash, Treasuries, gold, and defensive equity sectors. See "When to Hold Cash or Defensive Assets."

Defensive Sectors: Equity sectors with relatively stable demand regardless of economic conditions. Utilities, consumer staples, and healthcare are the classic defensive trio.

Dollar-Cost Averaging: Investing fixed amounts at regular intervals regardless of price. This strategy reduces timing risk and provides discipline for redeploying defensive cash.

Duration Extension: Increasing portfolio exposure to longer-maturity bonds, which appreciate more when interest rates fall. A defensive strategy when recession and rate cuts are expected.

Factor Rotation: Shifting portfolio exposure between investment factors (value, growth, momentum, quality, size) based on economic conditions or relative valuations.

Quality Factor: An investment style favoring companies with stable earnings, strong balance sheets, and high profitability. Quality tends to outperform during late-cycle and risk-off periods.

Rebalancing: Periodically adjusting portfolio allocations back to target weights. Systematic rebalancing forces selling winners and buying losers, implementing "buy low, sell high" without prediction.

Risk Parity: An allocation approach that equalizes risk contribution from each asset class rather than equalizing dollar amounts. Typically results in higher bond and alternative allocations than traditional portfolios.

Sector Rotation: Shifting equity allocation between sectors based on economic cycle positioning. Early cycle favors financials and industrials; late cycle favors healthcare and staples.

Strategic Asset Allocation: The long-term target allocation based on investor risk tolerance and time horizon. Tactical shifts are made relative to this strategic baseline.

Tactical Asset Allocation: Short-to-medium-term adjustments to portfolio weights based on market conditions, valuations, or regime assessment. Tactical moves are typically modest (5-15%) relative to strategic allocation.

Tail Risk Hedging: Using options, gold, or other instruments specifically to protect against extreme market declines. Tail hedges sacrifice returns in normal times for protection during crises.

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Cross-Reference Guide

For deeper exploration of specific concepts:

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Using This Glossary

This glossary serves as a quick reference when reading other articles in the Market Cycles and Regimes series. Terms are intentionally concise; consult the referenced articles for deeper treatment of each concept.

Bookmark this page for easy access during your research and analysis. The definitions provided here reflect US market conventions and data sources. International markets may use different thresholds or indicator sources.