Up, down, sideways...the markets are always moving. Can you make money in a less-than-perfect market? Take a look at some of the advice from years past in this historical article on business cycles.
The downside risk is always at a minimum when you buy stocks at "deflated" prices or in industries which are currently in disfavor. The market is always in the habit of overbuying stocks of favored industries or overselling "deflated industries."
Actually, deflated industries are often just in the "down" cycle of the whole economy, especially when they are plagued by excess capacity. Earnings of the nation's basic industries have experienced periodic ups and down in line with general economy. Those stocks whose earnings tend to rise and fall with the ups and downs of the economy are identified as cyclical stocks.
They are mostly stocks of substantial companies in industries which were once growth industries but have grown up so that they form the major part of the total economy. They are stocks usually selling at modest prices in relation to the capital they have invested in the business and to their proved earning power.
Most of them are being handicapped by a substantial overcapacity, with an inevitable decline in the utility of their machinery and other assets. It does not follow, however, that these assets have lost their usefulness. The excess capacity is apt to be absorbed by an appreciable pick-up in the rate of the nation's economic growth.
A 5 to 8 percent gain, for instance, in G.N.P. (Gross National Product) might bring the chemical industry, one of the industries with excess capacity, to over 90 percent of capacity, and this will do wonders for profit margins.
It is noteworthy that top fiscal policy makers of the Kennedy Administration have forecast a 10 per cent gain in G.N.P. in the next two years or so. Even without this projected substantial gain in G.N.P., the large companies of basic industries are expected to continue their cyclical growth in line with general business cycles; and there should always be opportunities if you know how to profit from them by studying the nature and patterns of these cycles.
During the postwar years, according to a study by Thomson & McKinnon analysts, a distinct cyclical pattern has been established, consisting on the average of a 2.5 year rise followed by a 1.5 year decline.
In 1949, 1953-54, 1958 and 1960, for example, our economy either was depressed or emerging from a recession, while the interim years were times of booming business and high corporate profits. A new boom will probably be under way by 1962, carrying into 1963, as indicated by most major economic indicators.
A simple way of telling whether an economic boom is coming is devised by William Kurtz of Paine, Webber, Jackson and Curtis. In his “Anticipating the Magnitude of Recessions and Recoveries,” he saw a close relationship between industrial production, bank reserves and residential construction over the course of a business cycle.
The combined effect of bank reserves and construction is said to have proceeded the turns in actual industrial production in seventeen out of 18 cyclical periods. While no single index of business expectations can be used effectively without considering all known economic variables, economists have long recognized the strategic role played by money supply and construction in generating business cycles; they provide us with a convenient way of taking a pulse of coming private capital investments which are found to have been responsible for much of the postwar cyclical fluctuations.
Since the basic cyclical industries constitute the primary sources of the economy, they should be among the first to move in either direction when major economic indicators signal an upturn or downturn. Economic activity should be accelerating at the primary level before rising demand for end products can be met.
Watch the cycles, without panic, and you'll come out strong in the long term.