How Economic Cycles Affect What You Should Do

The economy is cyclic. We have period of growth followed by period of deceleration. We all know that and we have witnessed some of the biggest bubbles and period of growth in the last decades. This will always be the case as it is the normal cycle of business.

Still, the interesting aspect of this reality for entrepreneurs and investors alike, is to understand how what you are trying to sell or where you put your money is affected by these cycles. Commodities for example are totally cyclic. Oil price which is now very low will certainly rebound. We don’t know when yet but we can be confident that the price will fluctuate over time. Some other products are not cyclic. They have their gold period and then the world moves on. One example is traditional cameras which were disrupted by digital technologies. If you are Kodak, you can wait as long as you want, the cycle won’t come back (and you end filling for bankruptcy). It is therefore crucial to understand how these cycles affect your business and investments.

When you invest money in something that is cyclic, patience is key. You can buy a house now and see its price go down over time. Still, having a very long-term perspective can help as generally the price of real estate will increase over time. For products that are not cyclic, it is essential to understand where you stand on the economic curve.

If the market is very new, you might be too early and have to wait years to get a return. It is not always a good idea to try to develop a new market from scratch. It takes huge efforts, a lot of time and most often that not, the pioneers don’t survive. The best thing is to be just a bit further on the curve, when such products or services start to gain penetration and you can see a clear growth and demand trend. Obviously, you don’t want to be too far ahead on the curve as you know that what goes up will eventually go down. For example today, the smartphone market seems to have reached maturity and even saturation. Apple’s latest quarterly report shows for the first time that the iPhone sales are not growing as much as in the past (they even foresee a decline in next quarter). We also know that today these cycles are much faster than in the past. Your environment can change very rapidly and brutally.

Doing this macroeconomic analysis is indispensable before you get started on a new venture, startup or investment. It is very hard if not impossible to go against specific economic trends even if you have the best ideas in the world. The market is king and always will be and so you already want to be on the right side when you get started.