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Different Economic Stages

There are different economic cycles and there are certain investments that do well in a specific economic cycle. The most commonly known business cycle are: recovery, expansion, slowdown and recession. There might be more or different categories that economists use but this will cover the general economic cycle. We will discuss what stocks are good to invest on in a specific economic cycle. While you have to calculate the fair value of a common stock to profit from your investment, it is good to have a head start by analyzing different economic cycles.


Economic Recovery occurs when the gross domestic product (GDP) of an economy has reached a bottom and it is starting to move up. Normally, producers will build up inventory in the expectation of a recovery. Since most economies are driven by consumer demand, this is where the bulk of economic growth comes from. Therefore, companies that do well in a recovery mode is consumer product companies such as Procter & Gamble, Colgate Palmolive, Pepsi and retailers such as Home Depot, Best Buy and the like.


Economic expansion occurs when GDP has started to grow robustly. At this time, companies seeing a recovery will invest more and more capital into long-term assets such as machinery, computers and other capital goods. An ideal stock to invest in this situation is semiconductor companies such as Applied Materials, KLA Tencor or heavy industrial producers such as Du Pont, Caterpillar and 3 M.


Economic Slowdown. Once consumers run out of steam, economic growth will slow. This is characterized with excess inventory in certain retailers and other consumer goods companies. In economic slowdown, the central bank generally lowers interest rate which bodes well for financial companies. Therefore, a good stock to invest at this point is banks such as Citicorp, Bank of America or investment banking such as Goldman Sach, Lehman Brothers and so on.


Recession. This is the dreaded part of an economic cycle. Recession is defined as two or more quarters of a decrease in GDP output. With weaker demand and higher unemployment, consumer will curtail discretionary spending such as buying a house or a car. Instead, they focus on their money on a more important thing such as foods and drugs. Therefore, in a recession, pharma and generic drug makers do well. So does food companies such as Kraft, Sara Lee and the like.


We have just covered the most basic investing know-how for different types of economic cycles. It should be used as a starting point rather than a definitive guide. Determining the fair value of a common stock is still the most important thing to do to profit from any investment. After all, buying a highly overvalued drug stock during recession time may not give you a good investment return.


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Source: www.articletrader.com