Business Cycles -- What Goes Around, Comes Around If you've been around for a while, you've probably noticed that most things tend to go in cycles. This is particularly true when it comes to the economy, with its periods of change known as business cycles.				> Home > Glossary > Support
		The length of these cycles is irregular, but they generally encompass four phases: expansion, prosperity, contraction and recession. Each phase can have a strong impact on a company's balance sheet and its stock price. In periods of expansion or prosperity, profits are likely to be high -- and stock prices as well. When the economy is slowing or stagnant, the reverse is true.
		Expansion and prosperity -- a booming economy -- are generally characterized by low unemployment and high rates of economic growth. People have jobs and consumers can afford to buy things on credit. In other words, there's a whole lotta spending going on -- and this fuels production. Companies have high earnings, people are generally confident, and the stock market seems an attractive destination for people's money. High earnings by companies are especially appealing to growth-oriented investors, who base their choices on earnings and projected earnings of companies.
		Contraction and recession, on the other hand, are usually characterized by high jobless rates and high interest rates. People spend less because jobs are scarce and they worry about the future. Production slows because demand for consumer items slows. Company earnings are down, and so are stock prices. This is the kind of environment a value investor loves, because he or she can look for stocks of solid companies that are trading at low prices because of the general economic conditions.
		Stock market behavior tends to change before a new phase begins, and not the other way around. In other words, the stock market will tend to slow down before a period of economic contraction, and to pick up before an expansion phase.
		The stock market also has its own up and down cycles. In fact, there is a whole list of terms that economists and pundits use to refer to different degrees of a market downturn. You may have heard some of them used. Routine Decline -- A fall of around 5 percent in the Dow, which historically has happened about three times a year. Correction -- A drop of 10-15 percent. Usually, the market "corrects" once a year, but in the 1990s it went for years without a correction. Severe Correction -- A drop of 15 percent or more. Bear Market -- A decline of 20 percent or more that continues for months, or longer. Crash -- A drop of 20 percent or more within a few days
		(Source: Securities Industry Association)
		Regulators try to learn from large market events. In the 1987 crash, for example, some blame fell on automatic sell orders (stop loss orders) which automatically sold investors' shares when they fell to a specified price. The more these orders kicked in, the more stocks flooded the market, leading to lower prices that triggered even more stop loss orders. So many stocks were being traded that the ticker (which announces up-to-the-minute stock prices) fell behind. Normally, the market fall would have been self-correcting to a point, because experienced traders would have stepped in and bought the low-priced stocks of healthy companies. However, they didn't in this case because they didn't have the latest price information from the ticker.
		The silver lining in all this is that measures have been taken since the 1987 crash to automatically stop trading temporarily if the market falls too far, too fast. The idea is to stem panic trading and give investors a breather.
		The market recovered from the 1987 crash, and the people who lost money were the ones who sold in a panic. Remember, you only lock in a loss if you sell the stocks when they are low. If you hold on to them, and the market recovers, you can still gain.

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