You’ve probably heard of stock market sectors before. Do you know what they are? In this article, you’ll learn basic business cycles and 11 stock market sectors!
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First, what is Business Cycles?
The business cycle is the collection of stages that an economy goes through as it expands, slows down, and declines. (1)
These cycles repeat, and people who understand where the economy is situated within the business cycle have a higher possibility to make money from stocks.
According to Malcolm Churchill Rorty (2), the business cycle has four phases: Revival, Prosperity, Liquidation, and Depression.
- Revival (early-stage) – Considerable unemployment, general business increase
- Prosperity (mid-stage) – Labor fully employed at a high wage, cost of doing business increase, selling prices increase
- Liquidation (late-stage) – Profit decline, goods focused on the market at a reduced price
- Depression (recession) – Prices and cost of doing business decline, merchandise stocks reduced
Question: Where are we in the current business cycle? (in 2020)
Are you ready for the answer?
I personally feel like it’s a liquidation phase, but the National Bureau of Economic Research’s Business Cycle Dating Committee said the United States economy officially entered a depression in February 2020. (3)
Did you get right?
Next, what is the Stock Market Sectors?
Stock market sectors are like business industries. Each sector has its own benefits, characteristics, and considerations. For example, some sectors tend to perform better or worse than others in certain phases. (4)
Here are 11 stock market sectors (5):
#1. Materials are chemical companies, mining companies, metals businesses, and logging companies like Rio Tinto and Ecolab. They are more sensitive to economic cycles and tend to perform well during the mid-to-late stages of the business cycle.
#2. Industrials are aircraft, electrical equipment, industrial machinery, transportation services, and infrastructure like Boeing Co, Lockheed Martin Corp, General Electric Co. These tend to be sensitive to economic cycles and perform better in the early-to-middle stages of the business cycle.
#3. Financials are related to money like Bank of America Corp, Visa, and PayPal Holdings. These are sensitive to changes in the economy and tend to perform well at the beginning of the business cycle.
#4. Energy is companies to extract sources of energy like Exxon Mobil Corp, Schlumberger, and Kinder Morgan. These tend to be sensitive to changes in consumer demand and the economy.
#5. Consumer discretionary is companies that provide products and services to consumers like Carnival Corp, Lululemon Athletica, and Grubhub. These tend to perform well at the beginning of a recovery.
#6. Information technology is software, hardware, and semiconductors companies like Apple, Cisco Systems, Oracle. These are some of the more volatile sectors.
#7. Communication services are like Verizon Communications, Facebook, Comcast Corp. It’s generally sensitive to economic cycles.
#8. Real estate is real estate development companies and management companies like Redfin Corp, American Tower Corp, and Simon Property Group. These are sensitive to economic cycles.
#9. Health care is medical device manufacturers and medical services providers like Johnson & Johnson, Pfizer, and McKesson Corp. These are less sensitive to economic cycles and tend to perform better in the later stages of the business cycle.
#10. Consumer staples are food manufacturers and distributors like Coca-Cola Co, Colgate-Palmolive, and Walmart. These are generally less sensitive to changes in the economy.
#11. Utilities are services like water, gas, and electricity to local communities. These are less sensitive to changes in the economy.
Understand business cycles, as well as each sector’s characteristics, may help you find your next investment opportunity.
Tip: Typically, the same sectors are affected by business cycles in the same way.
It’s really up to your investment strategies, but some people purchase their stocks from different sectors to prevent getting a huge impact by business cycles.
There are two types of investment strategies such as aggressive investment strategy and defensive investment strategy.
An aggressive investment strategy typically refers to maximize returns by taking a higher risk. It’s like high-risk high return.
On the other hand, a defensive investment strategy aimed at minimizing the risk of losing principal. It’s like a low-risk low return.
Both strategies have pros and cons.
As I mentioned earlier, put all your money in a single stock and/or sector can be risky. So, people usually diversify it and it called sector-based strategies.
Looks like this:
Find your investment goals based on the business cycles and also considerations of each sector. Then, build your investment strategies!
However, please consider risks, charges, and expenses on investing in a stock.
“Investing” is not magic. “Investing” is not a millionaire-making machine. It’s like a reselling business. You purchase items, hold them for a while, resell it to make a profit or sometimes a loss.
Set your comfortable investing budget and do not cross the budget.
My next investing post will be “gain income from dividends.” I need more time to research it because there are tons of resources…
Please stay tuned (:
- Fidelity. The business cycle and its investing implications Retrieved from https://www.fidelity.com/learning-center/trading-investing/markets-sectors/business-cycle-investing-implications
- N.I. Stone (1945). “The Beginnings of the National Bureau of Economic Research: A Tribute to the Memory of Its Founder: Malcolm C. Rorty.”
- Jeanna Smialek (2020, June 30). The U.S. Entered a Recession in February. Retrieved from https://nyti.ms/2XKvpfa
- Fidelity. Compare Sector Characteristics Retrieved from https://www.fidelity.com/sector-investing/compare-sectors
- John Divine (2019, July 16). Stock Market Sectors 101: The 11 Sectors of the Market Retrieved from https://money.usnews.com/investing/investing-101/slideshows/stock-market-sectors-101-the-11-sectors-of-the-market?src=usn_tw