-Justin Charbonneau, Client Advisor, McLean & Partners Wealth Management Ltd.
Still thinking of investing in the stock market, even with the current turmoil? That's good, because there are opportunities.
There are three important cycles, however, - the business cycle, the stock market cycle, and the emotional cycle - you should pay attention to so as to better manage your stock portfolio.
A business cycle is divided into phases, each describing economic activity as it moves from a peak to a trough and back again. Each phase describes the behaviour of a variety of economic indicators which reflect basic business conditions. Always remember, however, that the government's role in establishing such conditions must also be measured concurrently. Business cycles normally last between 3.5 to seven years.
While the stock market cycle follows a similar pattern, it does not coincide over the same time period as the business cycle. In its attempt to predict what will happen in the business cycle over the next six to nine months, the stock market cycle necessarily precedes any moves in the business cycle.
It is for this reason that the stock market peaks before the business cycle peaks, and that it hits bottom before the business cycle does. It is also for this reason that the stock market is known as a great discounting mechanism: it “builds in” economic events before they actually occur.
If you are not aware that a disconnect exists between these two cycles you may embrace the stock market cycle during times of upward momentum with undeserved confidence. Your confidence could quickly turn sour, however, when the business cycle moves downward.
With these facts behind us, let's now turn to the emotional cycle of the market.
By positioning the emotional cycle alongside the stock market cycle, you can easily get a sense of how your emotions and the stock market are not necessarily in sync. In fact, during times of extreme pessimism, as an investor you should understand the consistently paradoxical love affair between the business cycle and the stock market cycle, for it is at this point of maximum pessimism that maximum opportunities exist.
As Warren Buffet advocates, “be fearful when others are greedy, and be greedy when others are fearful.” During times of market uncertainty, financially strong companies in healthcare, utilities, and consumer staples provide a sense of stability, regular dividends, visible cash flow and earnings, and, if all goes well, maybe even some growth. You need to also be mindful of taking a long-term perspective, devoting a portion of your portfolio to cyclical companies poised for growth when this current market crisis recedes. Finally, owning well capitalized financial companies, even during this credit crisis, could prove to be a great long-term buying opportunity.
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