Business cycle and investment strategies

The business cycle can be subdivided in 4 phases.

1. Growth above average and rising
2. Growth above average and declining
3. Growth below average and declining
4. Growth below average and rising

I believe the way to manage an investment portfolio is to focus (the opposite of diversification) on the choice of asset classes that perform well in each of these phases.

When growth is above average, I select sectors that do well in a strong economy. This is the time when all commodities rise because of the robust demand from global business. Investors should focus on those stocks that are commodity driven: energy, energy exploration, energy drilling, metals, fertilizers, shipping, heavy machinery.

When growth is below average, completely different asset classes and stock sectors emerge as best investment choices. This is the time when commodities and interest rates decline. The strongest sectors are those benefiting from the lower cost of money: long-term Treasury and corporate bonds, high-yield bonds, regional banks, insurance, REITs, and defense.

The point is that stocks or asset classes that perform well in a strong economic environment are completely different from those doing well when the economy is growing slowly.

Diversification does not work for two reasons. The first one is that it makes your portfolio perform like the averages. Why not then buy the “average”, such as SPY (the ETF for the S&P 500). The second reason is that stocks that perform poorly because of the position of the business cycle drag down the performance of the whole portfolio.

The trend of business growth (rising or declining) should be used to guide your strategy by gradually investing your portfolio in sectors benefiting from the next phase of the business cycle.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

To find out more about my in depth view of the markets and my strategy just visit our website https://www.peterdag.com/. You can review The Peter Dag Portfolio, free of charge of course. You can also call me at 1-800-833-2782 to discuss your specific money management needs.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977