You may have heard of the NBER (National Bureau of Economic Research); they’re the ones that announce that a recession has officially ended – three years after the fact. The data may be slow to develop, and a bit dry, but a little digging can provide insight into investment decisions. There are four basic consecutive stages of the economic cycle, and some associated telltale signs of the economic stages: Early recession, Full recession, Early Recovery and Last Recovery – keep in mind that these usually trail the market cycle by a few months.
Early Recession
This is where things start to go bad for the overall economy. Consumer expectations are at their worst; industrial production is falling; interest rates are at their highest and the yield curve is flat or even inverted. Historically, the following sectors have found favor during these rough times:
- Services (near the beginning)
- Utilities
- Cyclicals and transports (near the end)
Full Recession
This is not a good time for businesses or the unemployed. GDP has been retracting, quarter-over-quarter, interest rates are falling, consumer expectations have bottomed and the yield curve is normal. Sectors that have historically profited most in this stage include:
- Cyclicals and transports (near the beginning)
- Technology
- Industrials (near the end)
Early Recovery
In this stage, things are starting to pick up. Consumer expectations are rising, industrial production is growing, interest rates have bottomed and the yield curve is beginning to get steeper. Historically successful sectors at this stage include:
- Industrials (near the beginning)
- Basic materials industry
- Energy (near the end)
Late Recovery
In this stage, interest rates can be rising rapidly, with a flattening yield curve. Consumer expectations are beginning to decline and industrial production is flat. Here are the historically profitable sectors in this stage:
- Energy (near the beginning)
- Staples
- Services (near the end)
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