Understanding the difference between stock market and economic cycles and how they are related to investment performance can help investors plan their strategies.
For example, did you know that a bull market for stocks typically peaks before the economy peaks? How might an investor use this information to their benefit?
(Source : www.business-case-analysis.com)
The Stock Market Looks Forward, the Economy Looks Back
Investors are looking forward and estimating prices for stocks today based upon reasonable expectations about the future, say three to six months ahead.
This is why the stock market has been called a "forward-looking mechanism" or "discounting mechanism."
If something unexpected comes along, either positive or negative, stock prices will react (or be "discounted") accordingly.
In contrast to the market and investors, the economy, or more accurately, economists, look backward.
They are looking at historical data, usually one to three months back, to provide measurements of economic health.
For example, if an economic recession began today, it would not be reported by economists with certainty for at least one month (or even three months or more if you factor in their revisions).
(Disclaimer : For information only and not to solicit business or provide any kind of advise)
