Cogito

Security Markets and Business Cycles

Posted in Uncategorized by qmarks on January 8, 2010

From 1873 to 1982 the US Economy experiences 26 recessions, with rare exceptions, the recessions were accompanied by a decline in stock prices. During the intervening expansions in business activity, stock prices usually rose.

Yields on corporate, municipal and US government bonds as well as other interest rates have nearly always risen during the later stages of upswings in business cycles  and fallen during downswings. Bond prices of course moved in opposite direction.

Typically the turn in stock prices occur prior to the turn in business activity. Hence stock prices are said to lead the swing in the business cycle, and stock price indexes are the leading indicators.

At the peak of business cycles, it is characteristic that stock prices have already been declining for some months, and at the trough of the business cycle stock prices usually have alredy started to rise.

On the other hand, bond yields frequently continue to decline for some months after a business upswing has begun, and occasionally continue to rise after a business recession has begun. Thus bond yields and interest rates are generally classified as coincident of lagging indicators.

Therefore, during the business upswing, the tendency of financing is through issuance of new stocks (IPOs), since the stock prices are increasing and bond prices are decreasing.

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