Tuesday 23 August 2011

Economic Cycle versus Stock Market Cycle




Sam Stovall's Sector Investing, 1996 states that different sectors are stronger at different points along the business cycle. The table below describes this theoretical model throughout the business cycle.
Stage: 
Consumer Expectations: 
Industrial Production: 
Interest Rates: 
Yield Curve:
Full Recession
Reviving
Bottoming Out
Falling
Normal
Early Recovery
Rising
Rising
Bottoming Out
Normal (Steep)
Full Recovery
Declining
Flat
Rising Rapidly (Fed)
Flattening Out
Early Recession
Falling Sharply
Falling
Peaking
Flat/Inverted
The graph below, courtesy of StockCharts.com , shows these relationships and the order the key sectors respond to the economic cycle. The Stock Market Cycle precedes the Economic Cycle as investors try to anticipate how the market will react to the changes to the economy.




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