Make sure your seated and secured, get ready for a wild ride. With the biggest stock market drop in 4 years a couple of weeks ago caused by China’s central bank may have gotten your heart rate going again and have you checking your RRSP balance every hour. The sky is not falling people, it’s all part of the economic cycle that goes up and down like a roller coaster. But what is the economic cycle you ask? Well let me give you a brief explanation to help you better understand whats going on.
Economic Cycle – Peak
The economic cycle or business cycle is often ignored when things are going smoothly however, when things go bad it gets lots of attention. With a simple economic cycle at the peak, businesses and the economy are doing well, everyone is buying things like cars, appliances, furniture and investors are investing and the government is collecting lots of tax dollars. During the peak inflation is high because the increase in the supply of money which indicates strong economic growth.
Economic Cycle – Valley
The valley is the opposite of the peak – high unemployment, businesses are struggling and the government is collecting less taxes. Because of all the uncertainty instead of buying that new car or new clothes, people are keeping their money in their savings account and investors are doing the same.
The Sweet Spot
The target sweet spot is right in the middle of the peaks and valleys. This is where we get steady predictable growth with smooth sailing for everyone. How do we get to the sweet spot? The government tries to keep us there with the following measures:
Monetary Policy – This is when the Bank of Canada tries to create growth by increasing the money supply, decreasing interest rates so that people cab borrow and spend more. When we are at a peak the Bank of Canada tries to slow everything down by increasing interest rates, basically they try to control the supply of money like a water tap.
Fiscal Policy – The elected government is responsible for the fiscal policy. The two main ones are taxation and government spending. When things are going well they increase taxes and should spend less and when things are slow they decrease taxes and spend more to give the economy a boost.
Keep Calm & Carry On
In market downturns like this it’s hard not to panic as the media starts using words like “Recession”, “Stock Market Crisis of 2015”, “Market Collapse” to get attention. The best strategy for investors right now is to stay calm and do not make any rash decisions that could make things worse. Remember the market goes in cycles with every up there is a down. If you are uncomfortable with the ups and downs you should speak to an advisor about your portfolio and have a risk assessment done to see if there are some changes that could be made.
Andrew Bradley @AndrewWBradley