HOW DO INVESTORS BUY STOCKS DURING THE BUSINESS CYCLE?

Because the peaks and valleys of the business cycle have such a profound effect on the stock market, investors are always on the lookout for signs that a new period of expansion or contraction is on its way, and change their investment strategies accordingly.

One such strategy is sector rotation—moving one's capital to stocks in different business sectors that perform best at different stages of the business cycle. For instance, volatile business sectors such as technology and entertainment were of particular interest to investors during the expansion of the 1990s.  When business contraction comes, investors may shift to defensive stocks—stocks in business sectors that are more stable, and that resist overall market declines. Utility stocks are considered defensive, as are those in foods and the consumer goods industry; after all, consumers need groceries and light bulbs, even in a recession.

Other investors take a long-term view, and hold their stock portfolios throughout the changes in the business cycle.  Despite recurring periods of decline, the overall trend of the stock market over the decades has been one of continual growth.  Rather than time their buying and selling to the expected boom and bust turns in the business cycle, buy-and-hold investors trust to the long-term growth of the stock market to overcome temporary declines and provide increased value over time.

Let's conclude with a recap of what we've learned about stocks and the business cycle.