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

RECESSION 

 
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
 
  

EARLY RECOVERY

 
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
 
  

MID-CYCLE

 
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
  

LATE-CYCLE

 
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