Business Cycles

Asset managers take decisions of asset allocation among sectors and industries depending whether the economies are improving or deteriorating

• Periods of expansion vs period of recessions: “peaks” and “throughs”

• Cyclical industries vs defensive industries

  • defines the type of the stock

economy begins to recover from recession = expect cyclical industries to perform best

Defensive indus have lil sensitivity to business cycle

• related to systematic or market risk in portfolio

• Cyclical stocks have higher “Betas” than Defensive stocks

Peaks & Throughs

Recession

A significant, widespread, and prolonged downturn in eco activity

The great recession

The eco downturn from 2007 to 2009 resulting from the bursting of the US housing bubble and the global financial crisis.

Recessions in the economy

• Unemployment rate rises

• Consumer purchases fall off

• People lose their homes

• Businesses go bankrupt

• Young people can’t get a good job after school

Companies int he MATURE phase of their life cycle (stable growth)

• Utility based sectors (production & distribution of elec, infrastructure) (healthcare, consumer)

  • Normally pay high dividends

  • Cash flow to dividends

Companies in the GROWTH phase of their life cycle or extremely cyclical sectors

• Internet based, commodities, consumer discretionary

• Cash flow to growth

Leading indicators

• Manufacturers new orders

• Credit to the economy indices

• Claims for unemployment

COINCIDENT INDICATORS

• Payrolls

• Industrial Production

LAGGING INDICATORS

• Average duration of unemployment

• Labor cost per unit of output (productivity)

• Change in the CPI for services

3 method to calculate GDP

• Income method

• Expenditures method

• Output method

Expenditures method

GDP = C + I + G + NX

Business cycles and the stock market