© 2000 John Petroff
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© 2000 John Petroff |
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D- Performance over business cycle
It was previously indicated (in Section A-3 of this chapter) that some investment strategies seek to capitalize on certain company stock behavior over the business cycle. It was noted in the analysis of industry growth (in Section B) that sales shortfalls can cause major company failures. This demonstrates how important an analysis of the impact of the business cycle can be, especially if the industry is classified as cyclical. But even for industries that are not known to be cyclical, numerous economic factors (such as hourly wages, inflation rate, cost of capital, availability of credit, international trade) that change over the business cycle, do affect all companies. The business cycle has an impact on all investors, since a bear stock market precedes a recession. Stock market indices are, in fact, acknowledged to be leading indicators (as seen in Chapter 15 Section C-5). This proves that investors or their financial analysts are capable of forecasting forthcoming economic recessions or expansions.
A detailed review of the phases of the business cycle, the behavior of major parameters and the method of forecasting them will be presented in Section B of next chapter. One will recall from any introductory course in economics that the business cycle goes from a recovery (following a trough), to an expansion, followed by a slow-down (after a peak) and ending in a contraction, and that this sequence repeats itself every three to ten years. It will be shown in Section B of next chapter that the business cycle has changed over the years, becoming less pronounced and lasting longer periods in the expansion phase. Still it would be incorrect to believe that it does not continue to influence industry sales and periodically cause business failures, as it has in the past. Graph G-14.10 reveals an unquestionable inverse correlation between rate of change of business failures and rate of growth of personal consumption expenditure.
Let us identify precisely how and why the business cycle influences industry performance differently depending on their type. It is understood that an analyst would conduct the economic forecast discussed in next chapter, before starting this investigation.
See review questions Q-14D.1 through Q-14D.3
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