The seemingly endless tug of war between the bulls and bears on Wall Street can be frustrating for even the most patient investors, which is why arming yourself with knowledge about how previous economic recoveries have played out can give you an edge. Business cycle analysis can help ETF investors distinguish between different phases of economic expansion and contraction, helping to pinpoint sectors of the market that perform better than others throughout certain phases.
As such, there are two pressing questions that must be answered at any point in time before jumping into an investment. First, what part of the business cycle are we in now? And the logical follow up is what asset classes should investors over or underweight during the coming months in an effort to favorably position themselves?
What Part Of The Business Cycle Are We In?
In its simplest form, the business cycle is another way to look at gross domestic product––the cyclical tendency of GDP is what allows investors to distinguish between periods of expansion and contraction. Right now we’re in mid-cycle expansion.
How can you tell? GDP is positive and slowly trending higher, the housing market and manufacturing data continue to show signs of recovery, while consumption and employment levels still have plenty of room for improvement.
There is no specific set of criteria to pinpoint the exact transition from mid to late expansion (or any other phase for that matter), and because every recession and recovery is inherently unique, investors who wish to employ business cycle analysis need to do their homework and stay on top of all major data releases in lieu of relying on others interpretations of them.
What Sectors Perform Best In The Middle Phase of Recovery?
After you determine where we are in the cycle, the next question is what sectors do you buy/sell/hold to reap the greatest returns possible over the coming months as we progress further into the mid-phase, inevitably approaching the late-phase (also known as the peak). As such, below we highlight three sectors that are poised to outperform broad equity benchmarks as the economic recovery takes full root.
For anyone interested in learning more about the business cycle and how it can help with their asset allocation strategy please refer to How To Invest In Sectors Using The Business Cycle. Note that the historical sector performance analysis below is based on research by Fidelity: