The Importance of Business Cycles in Financial Planning

When it comes to financial planning, it's important to recognize what we can and cannot control. We can control our own behavior, make thoughtful financial plans, and adjust our strategies as needed. However, we don't control the economic cycle, market movements, or policy decisions that impact the broader financial landscape. Recognizing this distinction allows us to focus on the aspects of our financial lives where our decisions truly matter. With some investors now worried about a possible recession and the stock market facing heightened uncertainty, we believe it’s a good time to review the fundamentals of business cycles and how they affect financial planning. What is the business cycle?
Business cycles represent the broader economy’s movement through periods of growth and recession, measured by metrics like GDP, employment, industrial production, and more. While the duration of a business cycle can vary significantly, they tend to occur over long periods, lasting 5-10 years on average. According to the National Bureau of Economic Research, there have been twelve recessions since World War II. In the last 25 years, we have experienced three: the 2020 pandemic recession, the 2008 global financial crisis, and the 2001 dot-com bust. Of course, there have been many more cases when investors and economists feared there might be a recession. Business cycles have also grown longer since the “stagflationary” period of the 1970s and early 1980s. The steady growth period until 2008 is often known as “The Great Moderation” - a period when the economy was strong, inflation was moderate, unemployment remained low, and the average cycle length was nearly nine years. Phases of the business cycle While each business cycle is unique, there are patterns that have emerged over time. In general, business cycles can be characterized by four distinct phases:
Each phase may not be equal in length, and there are both situations where business cycles last longer than some expect and cases where cycles end abruptly. For example, during the 1990s business cycle, the economy slowed sharply in 1995 without falling into a recession. The Fed was able to achieve a so-called “soft landing” by lowering inflation without negatively impacting economic growth. In contrast, the 2008 global financial crisis resulted in a swift economic decline due to a rapid collapse in the financial sector. The same is true in 2020 when the nationwide shutdown resulted in a sharp decline in economic activity. Trying to precisely time business cycles is notoriously difficult. This is one reason economics is often referred to as “the dismal science” - it has a poor track record of predicting recessions, and often predicts ones that never occur. However, recognizing where we generally are in these cycles can help us make better financial decisions nonetheless. Distinguishing between business and market cycles
Market cycles can be more volatile and occur more frequently than business cycles. The stock market can experience multiple corrections within a single business cycle, including several short-term pullbacks each year, due to investor sentiment, liquidity conditions, and other factors beyond the economy. This is because the market is anticipating the future while economic data is often backward-looking. Markets are certainly influenced by economic data, but news headlines, sentiment, and many other data points are also taken into consideration by investors. This means that markets can often overreact to short-term events. Financial planning through cycles Rather than attempting to time markets, the following approaches can help. The key is to ensure you stay on track with your financial goals throughout business and market cycles:
Portfolio resiliency across all phases of the business cycle Constructing an appropriate portfolio remains the cornerstone of investing across business cycles. Different asset classes can respond in unique ways to changing economic conditions. For example, stocks typically benefit from economic expansions but struggle during contractions. In contrast, bonds can generate income during expansions and provide portfolio balance during contractions. The right portfolio differs for each person, balancing these asset classes according to your time horizon, risk tolerance, and financial goals. A well-diversified portfolio might underperform the hottest asset class during any given cycle, but it also avoids the most severe drawdowns that can derail financial plans. The bottom line? Market and business cycles are natural parts of the investing experience. Rather than trying to predict each turning point, history shows that it’s better to maintain a well-constructed portfolio that can weather all parts of the cycle. |
||
Investment advisory services are provided by Blom & Howell Financial Planning, Inc. Copyright (c) 2025 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.
![]() |
Posts you may like

What the Fed's Rate Pause Means for Long-Term Investors


Tech Sector Underperformance and Concentration Risk
