What is the Business Cycle?
The business cycle is the normal, sequential, and repeated ups and downs of the economy. This continuous sequence has repeated over and over since the U.S. became an industrialized nation in the 18th century. A bell shaped curve provides the best illustration of the business cycle. The shape is simple, elegant and implies continuous change, with one cycle leading into the next (figure 1).
Introducing the Six Stages
Anyone with gardening experience understands that it is difficult to plant in the winter because nothing grows. The same is true for the financial seasons in the business cycle, where investors can use knowledge of the chronological bond, stock and commodity sequence to create a financial market calendar. By better understanding these financial seasons and using the correct forecasting tools, investors can make well-informed decisions and dramatically improve their chances for investment success. Each asset class has two turning points in a given business cycle—a top and a bottom. This means that a typical cycle has a total of six junctures—three buys and three sells. We call these the Six Stages. The calendar year has four seasons, each of which has its own characteristics. The same can be said for the business cycle, except we have organized it into six stages.
How Do We Know Which Stage We Are In?
The stage of the business cycle is identified through models or “barometers” for each of the three asset classes (Bonds, Stocks and Commodities). Our barometers are constructed from proprietary technical, and inter-market relationships that have been researched all the way back to 1955 by Dow Jones Indexes. When a majority of the components within a barometer are on a “buy” signal then that asset class is considered “bullish,” and when a majority are on a “sell” signal then that asset class is considered “bearish.” The barometer performance has been stress-tested under all kinds of geopolitical turmoil, wars, economic distress, monetary conditions, and embraces periods of inflation, deflation, crashes, booms and busts. We determine the prevailing stage of the business cycle by looking at each of these barometers. Stage I occurs when bonds are bullish and stocks/commodities are bearish. Stage II occurs when bonds and stocks are bullish while commodities remain bearish. Stage III reflects when bonds, stocks and commodities are all bullish. Stages IV, V and VI inverse of this sequence. We use this stage information to establish our broad tactical asset allocations guidelines.
Applying Business Cycle Stage Shifts to Tactical Asset Allocation
Doesn’t it make sense to reduce your exposure to stocks in anticipation of a recession and to purchase more stocks when the economy is expected to accelerate into a growth mode? For instance, during a recession in Stage 1, our asset allocation guideline includes a healthy mix of bonds and cash to stabilize portfolios. The opposite is true in Stage II and III, when the economy is moving up to full throttle and maximum exposure to stocks is recommended. We believe that our six-stage framework is an ideal way to construct an active allocation discipline, especially because it also serves as a critical risk-management tool.
In 2012, analysts at Dow Jones Indexes were intrigued with the research, and thoroughly tested the barometer data and business cycle theory going back to 1955. The results were strong enough to justify the construction of an index designed to track the strategy. The result was the Dow Jones Pring Business Cycle Index, the first proactively managed business cycle index for Dow Jones. The index incorporated a rules based system that identified the six stages and best allocated according to how each asset class and equity sector traditionally performed in every business cycle phase. Their thorough analysis found the strategy offered solid returns with less volatility for investors.
Call 1-800-700-9737 to speak with a Pring Turner Financial Advisor or...
The business cycle investment process, similar to the continually changing seasons, follows a logical sequence to make active asset allocation decisions. The approach marries our conservative investment philosophy to a disciplined decision process. Since the 1970’s, our repetitive decision making discipline has been used to profitably manage portfolios for conservative investors.
Our performance, in tandem with research provided by the folks at the Dow Jones Index organization, demonstrates that our philosophy and business cycle investment discipline provides attractive risk-adjusted returns over many cycles and years. Always being alert and anticipating the next inflection point in the business cycle creates a dynamically managed portfolio that takes advantage of emerging profit opportunities and also protects one’s wealth from the inevitable cyclical declines. Our research and investment performance are time tested and proven to benefit the “All Season” conservative investor.
Disclaimer: Pring Turner is a Financial Advisor headquartered in Walnut Creek CA, and is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. The views represented herein are Pring Turner’s own and all information is obtained from sources believed to be accurate and reliable. This information should not be considered a solicitation or offer to provide any service in any jurisdiction where it would be unlawful to do so. All indices are unmanaged and are not available for direct investment. Past performance does not guarantee future results.
Articles filed under Business Cycle Investing
January 10, 2019 - There is little doubt that the US economy is in a state of slowdown. That’s actually a good thing, because it offers some time to pause and refresh, thereby postponing either a recession, overheating or both. These pauses perform the... Continue Reading
August 13, 2018 - Holy cow! This economy is on fire; witness the second quarter U.S. GDP growth rate of 4.1%. Is it sustainable or a just a temporary spurt? It’s often said that the Copper price has a PHD in economics, because of... Continue Reading
June 25, 2018 - July 2018 will mark the 108th month of the economic recovery, making it the second longest expansion in history. Another 12-months or so and it will be the longest ever. Moreover, the consensus of economists foresees little trouble ahead. As... Continue Reading
November 25, 2016 - Academics and investors have debated over the superiority of a passive investment strategy versus an active investment approach for years. First, let’s clear up the confusion surrounding active investing. As fee-only investment advisors we believe “active” is best defined as... Continue Reading
January 1, 2016 - The heart of our investment approach focuses on business cycle associated trends for bonds, stocks and commodities and is based on two observations. First, there is a rhythm to typical business activity that has repeated continuously since the beginning of... Continue Reading