Cycles—whether it be the cycle of day and night, seasons, tides, fertility, or life and death—are fundamental to nature. The same is true for economies and investment markets. Some cycles are predictable; others merely echo past patterns. Despite efforts to tame them through policy and regulation, cycles persist. Often, just when we declare them obsolete, they reassert themselves—sometimes to investors' delight, but often to their dismay.
But what exactly are investment cycles? What drives them? And why should investors care? These questions are especially relevant after several years of strong market returns.
Cycles Within Cycles
Investment market cycles typically refer to fluctuations between strong and weak returns. While they stem from economic fundamentals, they are often intensified by shifts in investor sentiment—swings between optimism and pessimism.
There are three key types of investment cycles…
1. Long-Term (Secular) Cycles
These are extended bull and bear markets, often lasting 10 to 20 years, as seen in historical U.S. market data (see chart below…
It shows the cumulative real value of $100 invested in 1900. Secular bull markets – or 10-20 year periods where the trend in shares is up – can be seen in the 1920s, 1950s and 60s, the 1980s and 90s and over the past decade. In between in the 1930s and 1940s, 1970s and 2000s are secular bear markets – which are long periods where shares have poor and volatile returns.
Secular bull and bear phases are often related to what is known as Kondratiev waves, which take their lead from waves of technological innovation. Starting in the 1780s, water power, textiles and iron drove the first industrial revolution; steam, rail and steel drove the second industrial revolution; electricity, chemicals and the internal combustion engine drove a third Kondratiev wave into the 1920s; petro chemicals, electronics and aviation drove a fourth in the 1950s & 1960s; the IT revolution helped drive a fifth wave in the 1990s and another spurt more recently with digital media and artificial intelligence. These were associated with secular bull markets in the 1920s, the 1950s & 60s, the 1980s & 90s and over the last decade, with the move to lower interest rates & associated speculation also playing big roles in the last two.
At the end of each long-term upswing, share markets reached overvalued extremes and investors had become excessively exposed as optimism that good times would roll on forever reached extremes. This left shares vulnerable as excesses such as too much debt (1930s and 2000s), excessive inflation (1970s) and excessive speculation in tech shares and then housing in the late 1990s and 2000s became overwhelming, giving way to economic weakness and secular bear markets.
2. The Business Cycle (3–5 Years)
This familiar cycle tracks economic expansion and contraction, driven by factors like inflation, interest rates, and policy tightening. Shares tend to anticipate these shifts—rising ahead of economic recovery and falling before a downturn. Property markets usually lag slightly. Australian share market data reflects this cyclical pattern, though timing it remains a challenge.
3. Short-Term Sentiment Cycles
Within the broader cycles are shorter swings—weekly or monthly—caused by shifts in sentiment, market expectations, and macro data surprises. These can result in sharp corrections, typically between 5% and 20%.
Key Observations on Investment Cycles…
No cycle is identical: While patterns exist, cycles vary in length and character. History doesn’t repeat, but it often rhymes.
Cycles nest within each other: Secular bear markets still include shorter bull and bear phases.
Multiple cycles can collide: For instance, the early 2000s saw a business cycle downturn and the end of a secular bull market, triggering a 50% drop in global shares.
Cycles persist: Attempts to eliminate them have failed.
They self-correct: Downturns clear excesses, laying the groundwork for recovery.
Opportunities arise: Investors can adjust allocations—buying into downturns, reducing exposure in upswings.
Where Are We Now?
Currently, we’re in a relatively strong phase. Inflation has eased since 2022, allowing central banks like the Fed and RBA to cut rates, supporting growth—a “Goldilocks” scenario. However, risks loom: Trump-era tariffs have distorted inflation and employment dynamics, while strong gains over the past three years have pushed valuations—especially among the “Magnificent Seven” tech giants—into frothy territory. A pullback wouldn’t be surprising, even if followed by further gains fueled by rate cuts.
Other Relevant Cycles…
Seasonal Patterns: Historically, markets rally from November through mid-year, dip around May–October, especially August–September. This year defied that trend, complicating seasonal forecasts.
Political Cycles: In the U.S., a four-year presidential cycle shapes market trends. The first year typically sees average returns, the second year (mid-term election) often underperforms—sometimes significantly. Since 1950, the market has averaged a 17% drop in mid-term years. As we head into 2026, this pattern suggests potential turbulence.
Conclusion
Understanding investment cycles—and recognizing how they influence investor psychology—is essential. But remember: predicting them precisely is exceedingly difficult.
____________________________________________________________
Excerpts taken from Dr Shane Oliver’s Market Insights (AMP Group)