Investment markets have periods when prices are hign and periods when prices are low. These market cycles are inevitable but they’re also erratic and impossible to predict. It might take several months before a market high or low becomes apparent.

Market cycles affect every asset class, although different classes may respond differently to specific economic conditions. For example, when stock prices go up, bond prices may drop, and vice versa. Asset subclasses also can move in different directions. When large-cap stocks are doing well, small-cap values may decline or remain stagnant.

What Makes It Turn?

Economic conditions and the political climate affect market performance. When the economy is growing, stock and real estate markets typically do well. Tax and interest rate cuts, political stability, and increased corporate profits generally lead to rising stock prices.

Bond markets, on the other hand, often do well during times of political uncertainty. Moderate inflation, international conflicts, and a volatile stock market may boost bond prices.

Moving Together

Investments whose performance is closely tied to what’s happening in the economy are called cyclical stocks. Their ups and downs typically are fairly predictable, since they do well when the economy is strong and suffer during a downturn. Cyclical businesses include housing, car manufacturing, and airlines.

Stocks less affected by an economic downturn are those in industries—such as pharmaceuticals and utilities—where the demand for products and services generally remains about the same no matter what happens with the economy at large.

Market Movements

A sudden drop of 10% in the major market indexes is known as a correction. A crash is a sudden drop in stock values of 20% or more within a short period of time, accompanied by widespread selling. And when investors have driven stock prices to unsustainable levels, a bursting market bubble may bring stock prices more in line with their underlying values and offer investors a buying opportunity.

It is best for investors not to focus attention on corrections and run- ups in the market. Investment decisions based on emotions are not prudent investment decisions. Such corrections should be viewed as opportunities to buy.

If you have questions bout these issues or other investment, tax, or retirement plan issues, please call Brad Travis with Capital Investment Mgmt, Inc. in Leitchfield, KY at 270-259-0769, toll free at 888-474-8152, or check the company’s website at www.cimky.com. Brad has over 20 years of financial and estate planning experience involving over 7,000 income tax returns and over 10 years of investment experience managing millions of dollars.