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The Economic Cycle
In the late 1990's the business cycle, the "boom-bust" economic cycle was believed to be over. There was talk of the "new economy" lead by technology giving increased efficiencies and increased productivity per worker. The economic indicators in the US used to support this argument were low unemployment without an increase in wages and low inflation.
In 2000 the "new economy" was over and the "business cycle" or 'boom-bust" economy was not over.
Not all business cycles are identical, but they have enough in common to identify a beginning, middle and end. Each phase favours different types of investments.
Knowing the business cycle can help you invest in the good times and weather the bad times. We will look at each part of the business cycle in four categories; hot stocks, monetary indicators, economic indicators and human behavioural sentiment.
Recession
Early Recovery
Mid-Cycle
Late Cycle
| Hot Stocks - Consumer staples (food, forestry) - Utilities (gas, electricity, energy) - Large company stocks outperform | Monetary Indicators - Short term interest rates falling - Long term interest rates falling - Reserve Bank bias towards easing |
| Economic Indicators - GDP contracting - Inflation flat or down - Manufacturing sector low and falling | Sentiment - Deflation worries - Bank & Insurance adverts emphasise security - Newspaper headlines emphasise layoffs - Consumer confidence falling |
| Hot Stocks - Consumer cyclical (autos, retailers) - Technology (software, computers) - Industrials (factory equipment) - Small companies outperform | Monetary Indicators - Short term interest rates flat - Long term interest rates flat - Reserve Bank stops easing - Difference between short-term and long-term interest rates decreasing |
| Economic Indicators - GDP shows modest gains - Inflation flat - Manufacturing rising | Sentiment - Earnings worries still common - Bank & Insurance adverts emphasise safety - Newspaper headlines emphasise layoffs - Income investments in vogue - Consumer expectations rising |
| Hot Stocks - Technology - Consumer cyclicals - Large company stocks start to outperform | Monetary Indicators - Short term interest rates flat - Long term interest rates rising - Reserve Bank neutral - Difference between long-term and short-term interest rates widening |
| Economic Indicators - Factory capacity rising - Hourly wages rising - Manufacturing strong | Sentiment - Inflation worries increasing - Bank & Insurance adverts emphasise gains - Sector funds popular - Consumer confidence rising |
| Hot Stocks - Energy & Technology - Basic materials - Large company stocks outperform | Monetary Indicators - Short term interest rates rising - Long term interest rates rising - Reserve Bank bias tightening - Short term interest rates higher than long term rates |
| Economic Indicators - Factory capacity above 90% - Hourly wages rising - Manufacturing slowing | Sentiment - Momentum (high growth) stocks popular - Bank & Insurance adverts emphasise gains - Newspaper headlines emphasise the word "boom" - Consumer expectations falling |