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The business cycle, or the seemingly inexorable ups and downs of the economy, is inevitable—there will be both recessions and periods of growth. But predicting when these highs and lows will come is challenging and has eluded even some of the wisest investors. “The key is to invest one cycle phase ahead,” and “investors need to have a forward-looking mindset so they can prepare their portfolios to capitalize" (Hicks, 2017, par.12). The difficulty of predicting the business cycle is one reason why investing low-cost mutual funds is often suggested versus the investor attempting to second guess the business cycle.
For example, in regards to the current global economy, according to the World Economic Forum, although the world economy has rebounded from the global recession of 2008, “this has been the weakest post-recession recovery on record,” particularly in regards to productivity and investment (“Economic Storm Clouds,” 2018, par.1). In addition to the fact that the global economy does not always respond as expected to changes, there are also concerns that political instability, such as a trade war, can generate negative economic consequences and magnify bad economic news as well as reduce the potentially beneficial effects of good economic conditions on the world markets. An additional threat which can amplify the ups and downs of the business cycle and increase financial risk is the volatility of online trading, as computerized trading can set off a series of reactions in the markets. Cybersecurity risks, such as data breeches of major organizations, can likewise cause problems that are reflected in the financial sector (Knudson 2018).
References
Economic storm clouds. (2018). World Economic Forum. Retrieved from: http://reports.weforum.org/global-risks-2018/economic-storm-clouds/
Hicks, C. (2017). How to invest with the business cycle. US News and World Report. Retrieved from: https://money.usnews.com/investing/investing-101/articles/2017-10-10/how-to- invest-with-the-business-cycle
Knudson, J. (2017). Top bank risks in 2018. Retrieved from: https://bankingjournal.aba.com/2017/12/top-bank-risks-in-2018/
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