The Business Cycle — Expansion, Peak, Contraction, Trough

The four phases

Expansion (growth rising, rates low, credit easy) → Peak (inflation rising, Fed tightening) → Contraction/recession (growth falling, credit tight) → Trough (stimulus arrives, recovery seeds). Dalio's framing: it is a machine driven by productivity (slow trend) plus credit cycles (short ~5–8 years and long ~75–100 years debt supercycles).

Sector rotation

Sectors have cycle personalities: early-cycle leaders = cyclicals (financials, industrials, consumer discretionary — they lever the recovery); late-cycle = energy/materials (inflation); defensive = consumer staples, utilities, healthcare (demand is inelastic — they OUTPERFORM in contractions not by growing but by not falling). The rotation is not a calendar — it is a response to growth/inflation data.

The honest use

Cycle calls are low-confidence (economists miss recessions routinely). The durable use: KNOW your portfolio's cycle personality. If everything you own is early-cycle cyclical, you have made one macro bet many times (day 32's beta lesson, day 44's correlation lesson). Balance is the deliverable, prediction is optional.

Sources

• How the Economic Machine WorksRay Dalio
• Sector RotationInvestopedia