The Inflation/Deflation Phases Of The Stock Market Cycle by Martin J. Pring
Veteran analyst Martin J. Pring explains how the commonly known four-year stock market cycle actually contains lesser- known inflation/deflation phases, the knowledge of which would be very advantageous for asset allocation.
Many stock market participants are aware of the so-called four-year stock market cycle, which
encompasses primary bull and bear markets. However, it is not commonly known that each cycle can be
roughly divided into an inflationary phase and a deflationary phase — an important distinction for asset
In the deflationary stage, interest-sensitive and other defensive issues outperform the market, while in the
inflationary stage, earnings-driven issues and inflation beneficiaries, such as natural resource producers,
do well. The deflation phase begins after commodity prices peak and recessionary conditions gain the
upper hand. The inflationary segment gets under way as excess economic capacity is used up, commodity
prices rally and interest rates bottom out. The deflationary phase is associated with the late stages of a
bear market and the early to middle part of a bull market, whereas the inflationary environment occurs
late in the bull market and at the beginning of the bear phase.
Not all stocks fit into these inflationary and deflationary classifications, however, so this principle cannot
be applied universally. However, knowledge of the current phase of the inflation/deflation relationship
can still be useful for assessing the maturity of a bull or bear market.