Selecting stocks can be tough. But stock selection is much easier once you understand stock market and economic cycles.
Diversification is key. To build a portfolio, you should own several different stocks in several of the eight market sectors: consumer cyclicals, technology, financial, energy, industrials, basic materials, consumer non-cyclicals and utilities. Decide which of the market sectors to emphasize in your current portfolio by looking at the current stage of the economic cycle. A normal economic cycle lasts about four to six years from peak to peak.
(1) The stock market cycle leads the economic cycle by six to nine months. That means that the stock market will perk up several months before the economic cycle hits its trough. During this period, the best stock buys are in the consumer cyclical sector, that is, automobile manufacturers, building materials and retailing companies.
(2) Once the economy begins to rebound, it’s time to move to the technology sector, which includes computers, software and semi-conductors. The financial sector and the energy sector will also be strong, so look for insurance companies, banks and brokerage stocks to begin to rise, as well as oil companies.
(3) As the pace of economy activity picks up, its time to invest in the industrials
sector, including electrical equipment, machine tools and engineering construction.
(4) The stock market will reach its top before the economic cycle peaks. Now it is time to take a defensive position in the basic materials sector, buying forest, paper and chemical companies.
(5) As economic activity peaks and begins to fall, consumer non-cyclical sector companies become attractive: beverage, tobacco, health care and food companies. The utilities sector, telephone, gas and electric companies, becomes attractive as the economy continues to slide and the stock market approaches bottom.
When is the best time to invest? When you’ve got the money. Don’t let the ebb and tide of the normal business cycle frighten you. If you seek out quality companies, you can find opportunities any time during the economic cycle.