Market cycles
Markets move in long swings that feel obvious afterwards and never at the time. Knowing the pattern helps; timing it does not.
Over long periods share prices follow what companies earn. Over shorter ones they follow what people are willing to pay for those earnings, and that willingness swings a great deal further than the earnings do.
The two components of any move
A price is earnings multiplied by a multiple. So a price can rise because earnings grew, or because the multiple expanded, or both. Separating the two is the single most clarifying thing you can do to a market narrative.
Earnings growth adds value. Paying a higher multiple for the same earnings does not — it moves future returns into the present. A market that has risen mostly on multiple expansion has, arithmetically, lowered what remains available to whoever buys next.
The vocabulary
- Bull market. A sustained rise, conventionally marked from a low after a 20% or greater advance.
- Bear market. A fall of 20% or more from a high.
- Correction. A fall of roughly 10%.
These thresholds are conventions, not laws of nature. Nothing changes about a business when an index crosses one.
Why cycles are only obvious later
At the top, the reasons to be optimistic are specific, well argued and supported by recent evidence. At the bottom, the reasons for pessimism are equally specific and equally well supported. Both are constructed from real facts. The pattern is visible afterwards because we know which facts turned out to matter.
Not a claim that it is impossible — a claim about the evidence. Persistent, repeatable market timing is not something the available record supports, which is a strong reason not to build a plan that requires it.