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celerystalks

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« on: May 02, 2017, 07:33:43 AM »
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« Last Edit: June 27, 2018, 11:00:59 AM by L.A.S. »

thenextguy

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Re: Business cycle theory of investing. Anyone?
« Reply #1 on: May 02, 2017, 08:31:15 AM »
If you think people have a hard time forecasting the market, you should see how bad people are at guessing where we are in the business cycle.

talltexan

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Re: Business cycle theory of investing. Anyone?
« Reply #2 on: May 02, 2017, 12:32:52 PM »
Professional economist here: the conventional wisdom is that sales/output data lead the business cycle. Firms respond by hiring only after they see these drops. So when there's a downturn, PMI and GDP will typically start falling first, followed by the unemployment rate rising when firms realize the downturn is here. The unemployment rate--which is NOT the best way to judge the labor market--will take years longer to come back than these others.

PMI is actually a pretty good leading indicator, particularly for manufacturing. But it's not like you're seeing a number that Big Finance has missed if you use it. If you are committed to using the business cycle to invest, I'd recommend sector plays. Consumer products are a typical late-sector play. Think PEP, WMT, PG.

talltexan

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Re: Business cycle theory of investing. Anyone?
« Reply #3 on: May 03, 2017, 08:43:35 AM »
Schloss was part of the Graham school. I won't argue against that approach, but balance sheets are very micro- in nature. Most quotes I hear from Buffet, Munger, et al., suggest that they pay almost no attention to larger macroeconomic measures, preferring to consider specifics about a company and that company's market.

ChpBstrd

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Re: Business cycle theory of investing. Anyone?
« Reply #4 on: May 03, 2017, 11:11:09 AM »
I've seen several business cycle / sector rotation models, all based on historical patterns. Yes, rising inflation/rates, low unemployment, and soaring speculative investment categories all mark a peak. However, these trends can go on for years (or weeks!) before the fall. Thus, those models that scared me slightly away from stocks at various times over the past 8 years yielded false predictions and cost me thousands.
The financial media made a buck off my clicks though.

Perhaps rather than predicting the date of a turn, we should think in terms of the markets' sensitivity to changes. As valuation and competition increase, and as economic slack and yield expectations decrease, investors need fewer and smaller reasons to go defensive.

At unemployment 7%, PMI 1.5%, and PE ratios around 12, for example, investors might as well go long. Expected yields are good enough to justify the anxiety.

At unemployment 5%, PMI 3%, and PEs around 25, what's the reward for taking inordinate risk? At that latter point, a small negative event such as a quarter with poor earnings could start the exodus. The chance of avalanche is highest when the snow is deepest.

It wouldn't surprise me if rising interest rates or an action by the volatile and arguably mentally ill Trump administration finally triggered the avalanche.