We have only indicators to go by.
The Conference Board Leading Economic Index (LEI) is a New York based research association that publishes monthly economic data for the world's largest economies.
Here are some of the leading indicators used:
The Conference Board survey companies about output levels over the prior three months, i.e. their order books
They survey companies of their expected output volume for the next three months.
Another indicator is a measurement of consumer confidence.
The 'Yield Spread' is another important indicator. It is a measure of the difference between interest rates on long (10 year) and short-term rate government bonds. When the long-term rate is higher than the short-term rate, the higher than long-term 'Yield Spread' is positive and 'normal.'
However, when short-term rates are higher than long-term, a situation arises called an "inverted" yield. The 'Yield Spread' goes negative and this has been shown to consistently predict a recession. It happened in 2008, early 2000 and for each of the last seven recessions in the US.
'Yield Spreads' are popular because of their accuracy in predicting recessions.
However, NO indicator is 100% reliable.
Markets move in cycles. And a whole cycle from beginning to end,as shown in the diagram above, cn be seen as having 4 distinct phases.
Depending on which paper or magazine you read, these market phases are idenitified in different ways but they all roughly mean the same thing.
For example, the four stages shown in the above diagram, could have been described as:
For this web page,we will stick with the: early, mid, late, recession phase descriptions.
Each of these phases can be characterised by the following:
1. Early Phase:
2. Mid Phase:
3. Late Phase:
4. Recession Phase:
It should be clear that some sectors of the economy will prosper in each of the phases. The trick is know where the marketsare in relation to the cycle.
The best way to identify this is to consult a week-end edition of the Financial Times and look for the "Leaders and Laggards" section.
The picture portrayed above as taken from the Financial Times week-end edition of 17th/18th October 2020.
It doesn't take a lot of working out to see which sectors are doing best and which the worst. And with reference to the following, an (very) rough estimate of which phase the market is in can be estimated.
It must be said, that this is a very crude method of determining where the markets are at, and it is suggested that this "Leaders and Laggards" be monitored on a weekly basis, with a view to gaining some consistency.
Once a business cycle has been established, the sectors of the early cycle are as follows:
Early Phase constituents:
Mid Phase constituents:
Late Phase constituents:
The Recession Phase constituents:
'Stock Market Sectors' can be switched.
Switching of 'Stock Market Sectors' can be a very good strategy, IF you can get the timing right.
Most institutional investors, and hedge funds, use the indicators, as well as some of their own, to predict when to switch from one sector to another. They call it 'Tactical Asset Allocation.'
[We're going to start dreaming up a few weird expressions of our own].
Institutions, as well as switching sectors, will also switch stocks within sectors.
We suggest you do the same but back your own judgement and not that of others.
If you don't feel comfortable switching either sectors or stocks within sectors, then we suggest you adopt a more 'buy-and-hold' strategy.
After all, an old Stock Market adage is: 'It's time in the markets and not timing the markets' that brings long term success.
Profiting From The Lifecycle of Stocks by Corey Rosenbloom
Super Sectors by John Nyaradi
In the U.K. there are (at the time of writing this) 39 different sectors. Ranging from Aerospace and Defence to Travel and Insurance.
Some sectors only have a few companies included - some have many.
However, if you follow the philosophy of investing that we, (and Warren Buffett) prefer, you will only venture into a dozen or so sectors. You cannot monitor everything. We are in agreement with Mr. Buffett that investigating 20-30 stocks is more than enough.
Your chosen stocks will be in various sectors, which means that as well as keeping an eye on your chosen company stock, you should also keep a eye on the sector(s) that they belong to.
If you really want to study the idea of switching between individual sectors then we suggest you read the above books carefully and take a look at other web pages on this site. Notably, Sector Rotation.