How does the economic cycle affect the stock market?

The economic cycle is the long-term pattern of alternating periods of economic growth and decline. Growth periods are expansions of the economy or "booms". Periods of decline are contractions of the economy or "recessions". During the expansion phase of the economy, stock prices for companies often increase. Conversely, during the recession phase of the economic cycle, income and employment decline, and stock prices fall as companies struggle to sustain profitability.

In general, corporate earnings, interest rates, inflation, and other factors that change as economies expand and contract can affect the performance of investments. Thus, knowing the cycle may help investors evaluate and adjust their exposure to different types of investments.