Update four year cycle

Ter Veer and I used our four year cycle method with 10 phases for decades and often it supported the views on equities very well. It is of course not infallible and other methods are more popular today (often you see Hurst-like cycles of 54 months for example, those methods usually point to hell in coming quarters).


There are four base periods: the fast rise at the start, the first correction in the slower rising phase and the last fast rising phase leading to the high of the cycle, after which a decline, first slowly, later fast normally will develop.

According to us we still seem now to be in the phase FG. The range is quite wide because we are no longer in the period of the Great Moderation, but in the much more volatile period after the credit crisis with some kind of a New Normal. FG has lasted now quite long, so the next phase could start soon. The phase FG, in which economy grows about according to trend can last very long, especially after a Juglar decline before the start of the cycle. So a third correction is very well possible. FG has lasted long enough, so c2 could maybe signal the start of the phase GH. GH is a phase of fast rising prices. It ends at the top of the four year cycle, it looks like at an all time high for the S&P after which a material decline should follow in 2013.

It looks improbable to almost everybody that we are moving to a fast rising phase in the four year cycle, but maybe it is just because it is so difficult to imagine with all current fears about Europe and government bond yields signalling stagnation forever. When there is no recession in the US expected profits will continue to rise while PE’s are very low. Excessive liquidity from central banks could easily trigger higher confidence and so PE’s, maybe Europe is not totally lost, only a bit. So I would not disregard the possibility of a good equity market in the coming year.