How to use economic cycles in your investments?
October 29, 2023

The data and strategies presented in this article are based on the market reports of Martin Pring. The author entered the financial markets in 1969 and grew to become a leader in the global investment community. Since 1984, he has published the “InterMarket Review,” a monthly market letter that provides a long-term overview of the world’s major financial markets. He is also the chairman of Pring Turner Capital Group (, a capital management company, and the chairman of, an education-focused website with a technical focus.

A sought-after speaker worldwide, he is the author of many outstanding books, including the classic “Technical Analysis Explained,” now in its fifth edition. Since this unique book first appeared in 1979, “Technical Analysis Explained” has established itself as the number one guide of its kind. It is required reading for International Federation of Technical Analysts (IFTA) in their CFTe certification, as well as in many universities. For three decades, until it was replaced by his own guide, the book was mandatory reading for the Chartered Market Technician (CMT) certification.

The Intermarket Review (IMR) and its use

The portfolio allocation suggestions presented here (based on Pring’s guide) have two primary premises. First, they are aimed at an investor considered “neutral,” meaning someone who falls between a more conservative and a more aggressive risk profile. For example, a recommendation might be made for a 40% allocation to U.S. stocks. This direction, aimed at someone seeking passive income and security who is somewhat older, may not seem very assertive. Similarly, for a younger, more risk-seeking investor with future income from their professional success, this strategy may appear somewhat “conservative.” Therefore, the suggestions expressed here serve as a starting point to be adopted and adjusted according to the profiles and objectives of each individual investor.

The second point is that the allocation suggestions presented here serve to express, in practical terms, a reading of the current market and how to position oneself according to each specific context. Thus, we could conclude from the indicators presented that an allocation to assets benefiting from inflationary times might be a good alternative. The allocation suggestion to be presented below may emphasize assets that are more profitable when considering higher inflation (commodity-exporting country ETFs, commodity index-linked ETFs, or individual commodity ETFs). Or perhaps the indicators may lead us to the conclusion of harsher times for stocks and riskier assets, which would require a significant reduction in their portfolio weight.

The main premise to be taken from the interpretation of the text is that different asset classes and sectors perform differently depending on the context and where we are positioned in the current market cycle.

The business cycle

The Business Cycle is a long-term, sequential, and repetitive pattern of economic highs and lows observed over a long period. This continuous sequence has been observed many times since the United States became an industrialized nation in the 18th century. A bell-shaped curve provides the best illustration of the cycle. The shape can be seen in the figure below (Figure 1), implying continuous change, with one cycle leading to the next.

The ascending half (above the dotted line) of the bell curve implies the growth or expansion phase of the economy. This is a profitable period for companies, and employment conditions are favorable. The descending half (bottom) of the bell-shaped curve, or the contraction phase, is commonly referred to as a recession. A recession involves a reduction in business activity. Company sales and profits decrease. As companies lay off employees, unemployment rates increase, and household income declines.

Essentially, an investor needs two plans: one for defense to protect assets in difficult times, and one for offense to increase wealth during favorable conditions. Remaining alert and anticipating the next turning point in the business cycle creates a dynamically managed portfolio that capitalizes on emerging profit opportunities and safeguards wealth against inevitable cyclical declines.

The Pring Turner approach to investing based on the business cycle – A publication of the Pring Turner Capital Group – provides a clear view of how to anticipate economic turning points and determine whether it is an appropriate time for an offensive (wealth-building) or defensive (wealth protection) approach in investment portfolios.

The 6 Stages of the economic cycle

In agriculture, a plant adapted to winter conditions with very low temperatures and dry climate will hardly flourish in a hotter and very humid climate. Basically, the cycle shown above provides a tool that functions as a “seasonal” calendar and phases in the financial market.

By gaining a deeper understanding of these financial seasons or phases, using the correct statistics-based indicators, investors can make better-informed decisions and significantly improve their chances of investment success. Thus, the Pring Turner methodology suggests that each asset class has two turning points in each market cycle – a top and a bottom. This means that a typical cycle has a total of six crucial moments for decisions regarding each asset class (Figure 2) – three for buying and three for selling.

Uma imagem contendo Diagrama

Descrição gerada automaticamente

The stages are illustrated in Figure 2 (above) and begin with a slowing economy, when bond prices hit their lowest point, and continue to the eventual peak in commodity prices. The implication of the diagram is that each stage has the same duration, but this is not the case. Generally, the optimal timing of entry and exit is not as easy to predict, but proper preparation and an assertive strategy as indicated in Figure 3, based on the understanding of some fundamentals, may be the best choice.

Gráfico, Gráfico de barras

Descrição gerada automaticamente