Each phase of the business cycle—expansion, peak, contraction, and trough—has distinct characteristics that influence asset performance. For example, equities generally perform well during expansions but may see reduced returns or even losses during contractions.

These economic conditions can significantly impact the real returns from investments. Inflation erodes the purchasing power of money, making inflation-resistant assets like real estate or commodities more attractive. On the other hand, deflation increases the real value of money, often making cash or fixed-income securities more appealing.

The volatility of different asset classes can also vary depending on the phase of the business cycle. For example, equities may be more volatile during economic contractions, while bonds might experience lower volatility.

Macroeconomic indicators can serve as early warning signs for potential downturns. For instance, rising unemployment rates or contracting GDP can signal a recession, prompting investors to adjust their portfolios towards less risky assets like government bonds or gold to protect their capital.

Conversely, indicators like lower interest rates or increasing consumer spending could signify an economic expansion. Investors can capitalize on this by investing in growth-oriented assets such as equities or real estate, which tend to perform well in such conditions.