Economic Cycles and Portfolio Management
According to Investopedia, An economic cycle, also known as a business cycle, refers to economic fluctuations between periods of expansion and contraction. Factors such as gross domestic product (GDP), interest rates, total employment, and consumer spending help determine the current economic cycle stage. The stock market also has a cycle, as indicated by the chart, these cycles are inter-related.
Looking at the chart, notice how the stock market's cycle acts as a leading indicator to the business cycle. The stock market peaks before the economic cycle peaks. The economic cycle follows the stock markets' lead, as it peaks, contracts, sets a base, then expands.
It is also interesting to note on the chart above, the different types of stocks that rotate in and out of favor throughout the stock market cycle at different periods. Notice that during the stock market's late cycle Top, energy and precious metals stocks, then utilities and consumer non-cylical stocks come in favor, just before the business cycle has peaked.
Understanding the Business Cycles and Relative Stock Performance can help us monitor the stock markets and how it may affect various financial assets and client portfolios. We have had several extreme good and bad economic cycles over the last 25 years and we expect that to continue.
Our clients have the confidence knowing that their registered investment advisor representative is monitoring the stock market and business cycles for material changes that could have impactful changes to client portfolios. Please reply if you are interested in discussing the current stock market and business cycles.
