Markets · Investing Glossary
What Is Business Cycle?
The natural, recurring pattern of economic expansion and contraction over time.
The Full Definition
The business cycle is the recurring, irregular pattern an economy moves through: expansion, peak, contraction (recession), and trough, before expansion begins again. It's driven by interrelated forces — consumer spending, business investment, interest rates, and inflation — and it's the underlying economic rhythm that the market cycle and sector rotation both track. Different sectors and asset classes tend to lead at different points in the business cycle, which is why understanding roughly where the economy stands can inform portfolio positioning, even though precisely timing the cycle is notoriously difficult.
Real-World Example
Early in an economic expansion, cyclical sectors like consumer discretionary and industrials often lead as spending picks up; late in the cycle, defensive sectors like utilities and healthcare tend to hold up better as growth slows.
Related Terms
- Market CycleThe recurring pattern of expansion and contraction that markets move through over time.
- RecessionA significant economic decline lasting at least two consecutive quarters.
- GDP (Gross Domestic Product)Gross Domestic Product — the total value of all goods and services produced in a country.
- Sector RotationThe movement of investment capital from one industry sector to another as the economic cycle changes.