Boom
When equities reach a low aggregate level (e.g., N% less than combined assets) and with interest rates so low that investors cannot beat inflation in guaranteed investments, money comes into high supply. This creates a wave of new companies taking on new investors and creating new "value". Supposing all things are equal among different equities (e.g., marketing efficiency, employee pay, etc.), those companies that spend the most will necessarily be the most successful. In reality, some companies spin their wheels and squander their money, while others spend money wisely, but in the aggregate, those who spend the most money will have the most success during the boom. This creates a spending arms race, because the ensuing positive feedback loop gives the bigger spenders a competitive advantage that is paid for by increasing interest in their stocks. Companies that spend less are out-marketed and out-performed, and sometimes acquired by companies that spend more.
The cycle continues, until it doesn't.
Bust
With more eggs in fewer baskets, and with valuations nearing prior pre-crash highs, the math starts to make less sense for investors. Smart investors begin putting their money into safer equities (companies with more assets, and less debt), and divesting equity holdings in general in favor of more guaranteed vehicles (e.g., bonds). Other investors follow suit. The resultant decrease in the supply of investment dollars causes money to naturally become more expensive to companies (in the form of smaller stock prices). Sustainable companies (ones with more assets, and less debt) start spending less to prepare for the worst, while unsustainable companies are forced to take on more debt and investor capital at a premium. The Federal Reserve lowers interest rates to encourage lending, banks have already begun their "flight to quality" (credit crunch) to decrease their risk portfolio, and companies with more debt and less cash flow become insolvent and die.
The cycle continues, until it doesn't.
goto Boom;
