Share investing - how to ride the business cycle?

Which sectors to invest in depending where you are in the business cycle?

When deciding which company's shares to buy no doubt the individual performance should be key factor. Yet sometimes even the most prudent management can face impossibly strong headwinds that might stifle its profit generation. They come in all shapes and sizes, but the world post 2008 has proven that the most important one is the business cycle and identifying which point we're at.

 

The business cycle has four stages:

1. Market bottom

This is the low point of the cycle where unemployment is high, consumption and investment is low, GDP is stagnating. Because consumers are uncertain about the future they don't want to expand their discretionary (non-essential) spending if not to downright shrink it.

 

2. Bull market

Here the aforementioned indicators start to glue themselves off the floor. Consumer sentiment starts rising.

 

3. Market top

A this stage the markets starts showing signs of overheating - no idle production capacity. The economy's working full speed, there is practically no unemployment, yet there are many job vacancies.

 

4. Bear market

Here the economy starts not only to slow down, but maybe even contract. Firms start laying off workers. Interest rates are rising.

Depending on what moment in the cycle we're currently at you need to buy NOW companies that would do well in the next phase of the cycle. For the market bottom one group that historically does well consequitively, especially at the beginning, would be cyclicals (companies that depend on discretionary spending and are very dependent on the cycle). At this point they would be very cheap, which means that a killing can be made. Other companies would be the technology ones for the exact same reason. Towards the end of the period industrials are also permissible.

Bull market is the period where it's good to invest in the means that will fuel the upcoming market top - industrials, like cars and furniture, basic materials and energy. Market top of best went about with caution. This is the time to buy a good energy bargain, but basically one should start looking for some staple producing companies like retailers. At the end of the period and beginning of the other services are allowed, as people have likely purchased all the tangible goods they need by now. During the bear market however nothing but utilities and some industrials by the end are allowed if you want to make a good buck.

 

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