Investors' Holy Grail - The Business/Economic CycleThe business cycle describes how the economy expands and contracts over time. It is an upward and downward movement of the gross domestic product along with its long-term growth rate.
The business cycle consists o f 6 phases/stages :
1. Expansion
2. Peak
3. Recession
4. Depression
5. Trough
6. Recovery
1) Expansion :
Sectors Affected: Technology, Consumer discretion
Expansion is the first stage of the business cycle. The economy moves slowly upward, and the cycle begins.
The government strengthens the economy:
Lowering taxes
Boost in spending.
- When the growth slows, the central bank reduces rates to encourage businesses to borrow.
- As the economy expands, economic indicators are likely to show positive signals, such as employment, income, wages, profits, demand, and supply.
- A rise in employment increases consumer confidence increasing activity in the housing markets, and growth turns positive. A high level of demand and insufficient supply lead to an increase in the price of production. Investors take a loan with high rates to fill the demand pressure. This process continues until the economy becomes favorable for expansion.
2) Peak :
Sector Affected : Financial, energy, materials
- The second stage of the business cycle is the peak which shows the maximum growth of the economy. Identifying the end point of an expansion is the most complex task because it can last for serval years.
- This phase shows a reduction in unemployment rates. The market continues its positive outlook. During expansion, the central bank looks for signs of building price pressures, and increased rates can contribute to this peak. The central bank also tries to protect the economy against inflation in this stage.
- Since employment rates, income, wages, profits, demand & supply are already high, there is no further increase.
- The investor will produce more and more to fill the demand pressure. Thus, the investment and product will become expensive. At this time point, the investor will not get a return due to inflation. Prices are way higher for buyers to buy. From this situation, a recession takes place. The economy reverses from this stage.
3) Recession :
Sector Affected : Utilities, healthcare, consumer staples
- Two consecutive quarters of back-to-back declines in gross domestic product constitute a recession.
- The recession is followed by a peak phase. In this phase economic indicators start melting down. The demand for the goods decreased due to expensive prices. Supply will keep increasing, and on the other hand, demand will begin to decline. That causes an "excess of supply" and will lead to falling in prices.
4) Depression :
- In more prolonged downturns, the economy enters into a depression phase. The period of malaise is called depression. Depression doesn't happen often, but when they do, there seems to be no amount of policy stimulus that can lift consumers and businesses out of their slumps. When The economy is declining and falling below steady growth, this stage is called depression.
- Consumers don't borrow or spend because they are pessimistic about the economic outlook. As the central bank cuts interest rates, loans become cheap, but businesses fail to take advantage of loans because they can't see a clear picture of when demand will start picking up. There will be less demand for loans. The business ends up sitting on inventories & pare back production, which they already produced.
- Companies lay off more and more employees, and the unemployment rate soars and confidence flatters.
5) Trough :
- When economic growth becomes negative, the outlook looks hopeless. Further decline in demand and supply of goods and services will lead to more fall in prices.
- It shows the maximum negative situation as the economy reached its lowest point. All economic indicators will be worse. Ex. The highest rate of unemployment, and No demand for goods and services(lowest), etc. After the completion, good time starts with the recovery phase.
6) Recovery :
Affected sectors: Industrials, materials, real estate
- As a result of low prices, the economy begins to rebound from a negative growth rate, and demand and production are both starting to increase.
- Companies stop shedding employees and start finding to meet the current level of demand. As a result, they are compelled to hire. As the months pass, the economy is once in expansion.
- The business cycle is important because investors attempt to concentrate their investments on those that are expected to do well at a certain time of the cycle.
- Government and the central bank also take action to establish a healthy economy. The government will increase expenditure and also take steps to increase production.
After the recovery phases, the economy again enters the expansion phase.
Safe heaven/Defensive Stocks - It maintains or anticipates its values over the crisis, then does well. We can even expect good returns in these asset classes. Ex. utilities, health care, consumer staples, etc. ("WE WILL DISCUSS MORE IN OUR UPCOMING ARTICLE DUE TO ARTICLE LENGTH.")
It's a depression condition for me that I couldn't complete my discussion after spending many days in writing this article. However, I will upload the second part of this article that will help investors and traders in real life. This article took me a long time to write. I'm not expecting likes or followers, but I hope you will read it.
@Money_Dictators
Recessionproof
Guide to Recession - What Is It? Recession is a scary word for any country An economic recession occurs when the economy shrinks. During recessions, even businesses close their doors. Even an individual can see these things with his own eyes:
1. People lose their jobs
2. Investment lose their value
3. Business suffers losses
Note: The recession is part of an economic cycle.
If you haven't read that article, you can check it below:
What is the Recession?
Two consecutive quarters of back-to-back declines in gross domestic product constitute a recession. The recession is followed by the peak phase. Even if a recession lasts only a few months, the economy will not reach its peak after serval years when it ends.
Effect on supply & Demand - The demand for goods decreased due to expensive prices. Supply will keep increasing, and on the other hand, demand will begin to decline. That causes an "excess of supply" and will lead to falling in prices.
A recession usually lasts for a short period, but it can be painful. Every recession has a different cause, but they have the main reason for the cause of the recession.
What is depression? - A deep recession that persists for a long time eventually leads to depression.
During a recession, the inflation rate goes down.
How to avoid recession?
1. Monetary Policy
- Cut interest rates
- Quantitative easing
- helicopter money
2: Fiscal policy
- Tax Cut
- Higher government spending
3: higher inflation target
4: Financial stability
Unemployment :
We know that companies are healthy in expansion, but there is a saying, "too much of anything can be good for nothing."
During peak,
The company is unable to earn the next marginal dollar.
Companies are taking more risk and debt to reset the growth
Not only companies but investors and debtors also invest in risky assets.
Why does lay-off occur?
After the peak phase, companies are unable to earn the next marginal dollar. Now, the business is no more profitable. CCompaniesstart to reduce their costs to enter into a profitable system. For example - Labour
Now, Companies are working with fewer employees. Fewer employees must work more efficiently. Otherwise, they may be lay-off by the company too. You can imagine the workload and pressure.
You may argue that they should leave the company! Really? Guys, we just discussed the employment rate declines. How will you get a job when there is no job? Now, you get it!
Let's assume the effects of the recession on the common man:
Condition 1: He may be laid off.
Condition 2: Perhaps he will be forced to work longer hours. The company is unable to maintain a positive outlook. Fewer employees are doing more work due to massive lay-off. His wages decline, and he has no disposable income.
As a result, consumption rates are reduced, resulting in lower inflation rates. A slowdown in the economy is caused by lower prices, which decrease profits, resulting in more job cuts.
Four Causes of Recession:
1. Economic Shocks
2. Loss of Consumer
3. High-interest rates
4. Sudden stock market crash
1) Economic shocks - When there is an external or economic shock the country faces. For example, COVID-19,
2) Consumer confidence - Negative perception about the economy and the company from consumers who lack confidence in their spending power. Instead of spending, they will choose to save money. As there is no spending, there is no demand for goods and services. The absence of spending results in a lack of demand for goods and services.
3) High-interest rates - High-interest rates will reduce spending. Loans are expensive, so few people take them out. Consumer spending, auto sales, and the housing market will be affected. There can be no good demand if there is no lending. There will be a decline in production.
4) Sudden stock market crash - evade people's trust in the stock market. As a result, they do recall their money and emotion drives them crazy. It can also be considered a psychological factor. As a result, people will not spend money and GDP will decline.
Consumer Spending:
During the recession, consumers don’t have additional income called disposable income.
Consumer spending parts
-- Durable goods - Lasts for more than one year
-- Non-durable goods - Lasts for less than one year
-- Service - Accounting, legal, massage services, etc.
Durable goods surfer during the recession. Non-durable goods are recession-proof because their day-to-day fundamentals are not affected by recessions.
Let's take an example of two stocks,
ABC Food vs ABC car
But, will you stop buying food because of the recession? Will you reduce your consumption of toothpaste, bread, and milk?
The answer is "NO".
Consumers buy the same amount of food in good or bad times, On the other hand, consumers only trade in or trade off their car purchase when they are not only employed but optimistic about the safety of their jobs & confident that they could get a promotion or a high paid job with another employer. And People's disposable income is absorbed during the recession.
Consumer spending is the crucial point to displacing recession.
Auto sales:
As we discussed, few people buy cars during a recession. New car sales count as economic growth. You may have heard about 0% loans. The company facilitates a 0% loan to increase auto sales. Mostly, people repair their cars or buy old cars during the recession.
You may see a boost in the used car market and spare parts selling companies’ sales.
Home sales/housing markets:
I have a question now!
Which is your biggest asset? Most of you will say, my home!
New home sales are part of economic growth. Also, house price impact how wealthy consumer feel. Higher the home prices, the more they feel rich, and vice versa. When home prices are higher, consumers feel they are wealthy and they are willing to spend. But when house price declines, they reduce spending/consumption.
If your biggest asset price declines, you don’t spend and the economy takes a longer time to recover. A higher rate stops increasing the home price because they have to pay more EMI. central bank reduces rates during the recession, and the housing market rate boosts because the loan/EMI is cheap.
Interest rates:
Generally, interest rates decline during a recession. Central banks cut interest rates that’s why loans become cheap.
Benefits of Lower interest rates -
- - Boost in the housing market.
- - Increase sales of durable goods
- - Boost in business investment
- - Bonds and interest rates have an inverse relationship. An economic downturn tends to bring investors to bonds rather than stocks, which can perform well in a recession.
- - During the recession, interest rates are lower and banks higher the criteria for getting loans, so that people can face the abstracts while lending money.
Stock Market:
I want to clarify that, the stock market is not an economy. The economic cycle is lagging behind the market cycle and sentiment cycle. It gives me a chill as a technical analyst and a sad moment as an economics lover. Sometimes it's ahead, and sometimes it's behind. Recession = bear market .
Recession-Proof Industries:
* Consumer staples
* Guilty pleasures
* Utilities
* Healthcare
* Information technology
* Education
I will write about this in the future, but for the time being, let's get back to technical analysis .
How to Trade Stocks in a Recession – Survive the CODVID-19Where to put Money During a Recession?
#1 Recession-proof Stocks: Discount Store Industry.
Here is a list of retail stocks to keep an eye on during the 2020 recession:
Dollar General (NYSE: DG ) – during the 2008 crash DG rose more than 60% and since the middle of March 2020, it’s up the stock is up more than 38%.
Walmart (NYSE: WMT ) – since the COVID – 19 outbreak, Walmart stock is up more than 19% from its March’s low.
Dollar Tree (NYSE: DLTR ) – With a gain of over 60% return in 2008, Dollar Tree is another recession-proof stock that can withstand today’s coronavirus bear market.
These types of businesses do well during a recession. The retail discount industry will typically see a boost in sales, which typically means bigger profits for the companies and subsequently these stocks can beat all other S&P 500 stocks.
#2 Recession-proof Stocks: Health Care Industry.
Biotech company Amgen (NYSE: AMGN ) was among the best-performing stocks in 2008, gaining as much as 24.3% by the end of that year. During the COVID-19 stock market crash, Amgen has gained roughly 24% since its March low.
#3 Recession-proof Stocks: Delivery Services Industry.
The biggest courier companies in the USA are UPS Inc. closely followed by FedEx Corp .
With over 3 billion of the global population in lockdown due to coronavirus quarantine, the home delivery services industry has become an essential component of our society.
The foundation of making money when the stock market crashes or in any other type of investing is to study the past.
Here is a stock trading tip:
Compare which stocks have performed well during previous recessions.
For this exercise, we’re going to have a look at the stocks that soared during the financial crisis of 2008.
During the subprime mortgage crisis of 2008, the US stock market lost almost 40% of its value. But even in those dire times, where the majority of stocks plunged, there were some healthy stocks that survived the crash.
Given the coronavirus stock market crash, we’re going to have a look at 5 recession-proof stocks that can survive this bear market.
When we can learn something from the stock market history, it’s best to pay attention.
Stock investors looking to pick healthy stocks can start first by including the above-mentioned names in their portfolios.
How to Trade Stock In a Recession?
A study has been conducted to assess the past six recessions and revealed that if you invested in the Dow stocks during those recessions only during the 1980 recession the portfolio value would have made profits by the end of the recession.
Now, you might be wondering…
“How you can profit from a recession?”
The straightforward method to trade stock in a recession is by short selling.
You can make money when stock prices go down by short selling. Actually, stock day traders can make money both ways, when the stock price goes down and when the stock price goes up.
Finding good stocks to hold and make profits during a recession is pretty hard.
Alternatively, buying dividend stocks can become another profitable method to invest during a recession.
Dividend stocks can provide a good source of passive income during times of a recession.
You can also use Google Trends for stock picking.
However, by far the best stock trading strategy in a recession is day trading.
In a typical recession, stock investors will experience more volatility , which is the perfect paradise for day traders. Stock day traders will continue to see volatility as the uncertainty around the coronavirus persists.
One major characteristic of a bear market is high volatility compared to bull stock markets.
And, the 2020 bear market holds the record as the fastest bear market in history. Bull and bear market volatility look very different. So, as you may imagine, stock volatility is through the roof during the 2020 recession.
We’re going to teach you how to make money during a recession with a day trading strategy inspired from Trading Guru Larry Williams .
See below:
Day Trading with the Best Stock Trading Strategy in a Recession
Day trading during a recession can be the fastest way to grow your account.
With day trading you can trade both ways:
You can take advantage of both the bearish trend as well as from the sharp rallies.
Our stock day trading method is based on the same method that Larry Williams used to generate more than $1 million in profits in the world futures championship Robbins World Cup.
But, there is a twist.
Our team of experts took Larry’s Smash day reversal pattern and twisted the rules to fit our recession strategy.
Now, you may be asking yourself:
What’s a Smash day reversal pattern?
According to Larry Williams , a Smash bar is a bar of increased volatility with long wicks. The Smash bar trading pattern indicates a potential reversal of the preceding impulsive movement.
Let me explain…
If on the intraday level, the stock price starts all of a sudden to experience a high level of volatility , this should leave behind candle bars with long wicks.
Now, it’s important to make the difference between the Smash bar trading setup and the typical Pin Bar chart setup. While these two stock chart patterns might look similar, the pin bar has a small body candle, while the Smash bar has a typical larger body.
The stock reversal pattern is completed once the next candle breaks above the smash candle, which will subsequently trigger a buy signal.
Note* obviously the protective stop loss can be placed at the other end of the Smash bar.
This stock chart pattern works because the increased volatility will attract more traders to take an interest in the stock. However, if the next bars go in the opposite direction it will signal a reversal in the current stock price direction. Subsequently, this will lead to further liquidation along the road and exacerbate the stock price reversal.
Now, the coronavirus crisis has unleashed unprecedented levels of stock volatility .
This is good news because it means the Smash bar pattern will tend to reoccur more often.
You can buy and sell stock in a recession due to the elevated stock volatility .
We have learned how to buy stocks, but what about how to sell stocks during a recession?
We use the same principles but in reverse.
There is also a slight variation of the Smash bar reversal pattern that we can use.
Larry Williams calls it a hidden Smash bar.
Let me explain it to you:
When a highly volatile bar emerges out of the blue that can be a signal of reversal. This bar must have its closing price in the lower third of the stock price range. And, it must be bigger than the bars close to its proximity.
Note* this time we don’t count on the long wicks.
Note* this day trading pattern works best when we trade it in a context of an established intraday trend as a continuation pattern.
Final Words – Best Stock Trading Strategy in a Recession
Use our best stock trading strategy in a recession if you want your account to go up even when the market crashes. Learning how to trade stocks in a recession can help you survive while keeping you risk adjusted. The average recessions last 18 months, so it’s important to find different methods to protect yourself.
Alternatively, you can also learn where to put money during a recession a safe way. Stock investors can put their money in high –quality stocks (recession-proof stocks) like:
Consumer staple stocks
Discount store stocks
Pharmaceutical stocks
Delivery service stocks or food delivery stocks
If you’re more of a stock risk-taker, the best way to make money during a recession is by day trading the stock market. Larry Williams’ Smash day pattern is a simple but very effective way to trade stocks in a recession.
