Episode 22: The Business Cycle (Visible Only in Hindsight)

Hey! I'd love to hear your thoughts, send me a voice note.Episode Summary Are we in a recession right now? John can’t tell you—and neither can any other economist. In this episode, John and Jane break down the four phases of the business cycle, explain why lagging indicators like unemployment make recoveries feel completely invisible, and reveal the think-tank committee that officially dates Canadian recessions long after they are over. They also explore the highly cyclical nature of Canada's stock market and share a crucial warning on why trying to use the business cycle as a market-timing tool is a surefire way to lock in permanent losses.Key ConceptsThe Four Phases: The economy doesn't grow smoothly; it rotates through expansion (output and confidence rising), peak (growth decelerating, capacity stretched), contraction (output falling, investment deferred), and trough (the bottom where activity stops falling and begins to recover).Leading, Coincident, and Lagging Indicators:Leading: Turn before the economy (e.g., building permits, stock prices, consumer confidence, and the yield curve).Coincident: Turn with the economy (e.g., GDP, retail sales, and employment levels).Lagging: Turn after the economy. Unemployment is a lagging indicator because firms delay hiring and firing. This is why recoveries initially feel like nothing is happening.Who Dates Canadian Recessions? While the two-consecutive-quarters rule of thumb is a common shorthand, Canada's recessions are officially dated retrospectively by a committee at the C.D. Howe Institute. They look at the depth, duration, and breadth of the contraction across the economy rather than relying on a single mechanical formula.The Imported Cycle: Because Canada is a small, open economy that sends a massive share of its exports to the US, a US recession will pull Canada down regardless of domestic conditions. The Canadian cycle is substantially imported.Sector Playbook: Cyclical vs. DefensiveCyclical Sectors: Industries like autos, construction, luxury travel, and resources do exceptionally well in late expansion when confidence is high. However, their revenues collapse rapidly in a contraction as households postpone major purchases.Defensive Sectors: Inelastic demand keeps sectors like consumer staples (groceries, toothpaste), utilities (electricity), healthcare, and telecommunications steady. They don't fall as far in a downturn, but they also don't rise as far in a boom.The Canadian Concentration: The S&P/TSX is heavily weighted toward financials, energy, and materials, making the entire Canadian stock market highly cyclical and sensitive to downturns.Jane’s Practical WarningsDo Not Time the Market: Stock markets are leading indicators that turn up before a recovery is visible. If you wait for a recession to be officially confirmed before acting, you will likely sell at the absolute bottom.Correlate Your Job and Portfolio: If your job is cyclical (e.g., construction or resources) and your portfolio is heavily invested in Canadian banks and energy, your income and your savings will fall at the exact same time.Disclaimer This show provides educational content and does not constitute financial advice. John and Jane are not registered to advise you on securities; please consult a licensed professional for your personal situation.