Sector Rotation and the Business Cycle – The Basics
Sector rotation and the business cycle sound complicated. But once you think about the basics of the economic cycle, everything becomes pretty clear. So here’s what you need to keep in mind…
The business cycle refers to the expansions and contractions of the economy. And investors are always concerned with how this affects stock prices in different sectors. They’re also concerned with how government policies and central bankers interpret the business cycle. For example…
If the economy is contracting, central bankers will stimulate the economy by lowering interest rates (and using the other FED policy tools). And if the economy is growing central bankers may put pressure on growth to slow down inflation. These actions are what you should really be watching as an investor trying to capitalize on sector rotation. Now let’s get into some specifics…
Diagram of Sector Rotation and the Business Cycle:
Sector rotation and the business cycle go hand in hand. As interest rates (and cost of capital) change, so do the relative appeal of investments. And since a picture is worth a thousand words, take a second to review this sector rotation and business cycle diagram.
The above diagram distinguishes the impact of the business cycle on sector rotation (Chart from ACG Advisors)
As you can see in the diagram above, the business cycle has a massive influence on sector rotation. And if you want a little more detail…
Sector Rotation and The Business Cycle: Further Reading
While the above chart should give you a lot of context on how sector rotations are influenced by the business cycle, there are other great resources you can review. And surprisingly, one good introductory resource for learning more about sector rotation and the business cycle is Jim Cramer’s Real Money. He even includes his own version of the above business cycle diagram…
Cramer’s Real Money provides great insight on how traders and investors can capitalize on sector rotation using changes in the economic cycle (Click to Enlarge).
Jim Cramer’s Real Money provides a lot of insight into sector rotations and how they are influenced by central bank policy makers and the business cycle. His portion of this book is really focused on how to make the most money in different parts of the economic cycle. So if you’re looking for more actionable information on how to take advantage of sector rotations and the business cycle you may want to read this Real Money book review.
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