Over the last few weeks something interesting has happened.

CBA shifted to the view that rates are likely to move lower next year. NAB followed. Financial markets have also backed away from expecting further rate hikes. Most recently, the RBA left the cash rate unchanged at 4.35%.

What’s interesting is that the economic backdrop hasn’t improved much at all.

Inflation remains above the RBA’s target band. Unemployment is rising faster than expected. Australia has slipped back into a per-capita recession and housing markets have softened across many parts of the country. If you only looked at the economic data, you’d probably conclude very little has changed.

Yet expectations have clearly started changing.

The reason I find this interesting is that it highlights something many investors struggle with. The economy and the market are not the same thing. The economy tells us what’s happening today. Markets spend most of their time trying to work out what happens next.

That’s why turning points are so difficult to identify in real time.

Looking Forward Versus Looking Back

Most economic data is inherently backward-looking.

When we talk about inflation, unemployment, GDP growth or retail spending, we’re generally talking about something that has already happened. By the time the data is published, investors have often moved on to asking what the next six to twelve months might look like.

This creates an interesting dynamic.

The economy can still look weak while markets begin improving.

The economy can still be deteriorating while investors start becoming more optimistic.

The headlines can remain negative while asset prices begin moving in the opposite direction.

That sounds counterintuitive until you remember that markets are trying to discount the future rather than describe the present.

One of the most useful concepts when studying cycles is understanding the difference between conditions and direction. Conditions tell us where we are today. Direction tells us where we’re likely to be tomorrow.

Markets care about both, but direction is usually more important.

An economy can still be weak while simultaneously becoming less weak.

In many cases that’s exactly what a turning point looks like.

Why Investors Often Miss Turning Points

One of the reasons major turning points are so difficult to navigate is because they rarely feel comfortable at the time.

When a cycle bottoms, confidence is usually low. Economic data is still disappointing. Most people are focused on the risks because those risks are visible and measurable.

The opportunities are harder to see because they’re based on expectations rather than facts.

Every cycle seems to create the same behavioural trap. Investors wait for confirmation. They want inflation back inside the target range. They want unemployment stabilising. They want interest rates falling. They want confidence recovering.

The problem is that by the time all of those things are obvious, markets have often moved a long way.

Nobody rings a bell at the bottom of a cycle.

The future gradually becomes less bad before it becomes obviously good.

Property Cycles Behave The Same Way

Property markets are no different.

One of the reasons I’ve spent so much time studying property cycles is because the same pattern appears over and over again. Some of the strongest opportunities emerge when sentiment remains weak but the underlying fundamentals have already started improving.

Rental growth accelerates.

Vacancy rates tighten.

Affordability improves.

Yields rise.

Holding costs become easier to manage.

The broader market may still feel negative, but beneath the surface the foundations for future growth are slowly being laid.

One of the more interesting patterns I’ve observed is that local peaks in rental yields often occur around the same time investors are least interested in a market. Prices have generally been weak for some time, rental growth has accelerated and sentiment remains poor.

Most people see the weak sentiment and assume the opportunity has disappeared.

In many cases, the opposite is true.

The improving cash flow, rising rents and better affordability are often creating the conditions for the next growth phase.

This doesn’t happen everywhere at once. Property markets don’t move in unison. Some markets are expensive and fully priced while others are quietly improving beneath the surface.

That’s why understanding cycles matters.

Expectations Are Starting To Shift

Whether CBA, NAB and financial markets are correct about the exact timing of future rate cuts is almost beside the point.

The more important observation is that expectations have started moving.

A few months ago the discussion centred around how many additional rate hikes might be required. Today the discussion is increasingly focused on when the first rate cut might arrive.

That’s a meaningful shift.

Not because rates are falling today.

Not because the economy is suddenly healthy.

But because investors are beginning to think about a different future than the one they were pricing a few months ago.

The market is starting to look beyond current conditions.

That’s often how major turning points begin.

The Bigger Lesson

One of the reasons I enjoy studying markets is that the same principles seem to repeat across different cycles, asset classes and even different decades.

The headlines usually describe the present.

Markets spend their time trying to price the future.

The two are often aligned in the middle of a cycle. Around major turning points they can appear completely disconnected.

At the moment the economic data still looks soft. Inflation remains above target, unemployment is rising and growth is weak. None of those observations are particularly controversial.

What’s becoming more interesting is that expectations are beginning to shift despite that weakness.

Whether that shift ultimately proves correct remains to be seen.

But history suggests that some of the biggest opportunities emerge when the news still feels uncomfortable and the future is still uncertain.

That’s because markets don’t wait for conditions to improve.

They move when expectations begin to change.