The Game of Investing, Vol. 4
- Real Vision
- March 17, 2023
Welcome to The Game
The Game of Investing Newsletter…
…a bi-weekly newsletter where you learn from investing pros about how this game actually works.
Because learning about finance shouldn’t be boring.
This Week…
We’re covering the business cycle — and how understanding the ebbs and flows of economic activity can help you analyze markets and build a sustainable portfolio.
Our expert today is Real Vision’s Jamie McDonald, who explains why this concept is so important right now:
- “Between high inflation, rising interest rates, and geopolitical uncertainty, you have the makings of a complex market with the potential for excessive volatility.”
In this issue, we’ll cover 3 things:
- The Truth
- The Stages
- Today’s Business Cycle
Understanding turning points in the business cycle won’t automatically make you money. But it will give you another tool to make better-informed decisions for your future.
Let’s dig in.
LEVEL 1 — The Truth
“History does repeat itself,” says Jamie. “Never in exactly the same way, but so often we make the same mistakes over and over again.”
This is a historic moment in markets. Interest rates have reached 16-year highs, liquidity is drying up, and investors are worried the Fed will break something.
Frankly, it’s easy to feel like we might be f*cked.
🔑 But what if that feeling of dread is actually an opportunity?
In the latest episode of our new series How to Unf*ck Your Future, Andreas Steno Larsen and the CEO of Sprott Asset Management, John Ciampaglia, discuss why now is the right time in the cycle to add exposure to the clean energy revolution.
- If you’re not a Real Vision member yet, you can start a 14-day trial and get access to this episode plus the entire How to Unf*ck Your Future series for free. If you’ve been thinking about joining, there’s never been a better time.
Level 2 — The Stages
There are 4 stages of the business cycle, which “last anywhere from a few years to around 7 years,” says Jamie. “More recently, they’ve stretched out even further.”
- Despair — When fear becomes consensus, equities struggle, but sectors like healthcare and utilities can relatively outperform.
- Hope — As the economy adapts to slower growth, hope creeps in. The early phase of Hope is often the best entry point for risk assets.
- Growth — Hope overwhelms bearish sentiment and springboards economic recovery. The sectors that were punished most during Despair tend to rebound fastest. Cyclical sectors like consumer discretionary, autos, and construction perform well.
- Optimism — Complacency sets in — time for caution. “Depending how big the cycle’s boom has been determines how much downside you can expect,” says Jamie.
Level 3 — Today’s Business Cycle
The business cycle is always changing. Things like inflation, demographics, technological advancements, and monetary policy all impact productivity and consumer confidence.
The best leading indicator of the economic cycle is the ISM Manufacturing index — which measures U.S. business activity and comes out each month.
- An ISM number above 50 indicates economic growth; a reading below 50 indicates contraction.
- Historically, stock market performance closely tracks the ISM, with big moves in business activity predicting market crashes and new bull markets.
This year, February ISM came in at 47.7%, higher than January but a fourth straight month of contraction.
So, recession and despair, right?
Predicting the business cycle isn’t quite so easy. If ISM falls further and the Fed loosens policy, this could turn to growth in the blink of an eye.
As an investor, it’s your job to adjust your portfolio accordingly.
- “Having a rigid investment framework actually penalizes you over the long-term,” says Jamie. “If you had stuck with a traditional, 7-year business cycle through the 2010s, you’d have been wrong for 5 years.”
Next Time
Thanks for reading. In our next issue, we’ll lay out the stuff you need to forget as an investor… (except for what you’ve just read, of course).
See you then.
Have feedback on The Game of Investing? We’d love to hear it. Just email us at essential@realvision.com to share your thoughts.
The Game of Investing Newsletter…
…a bi-weekly newsletter where you learn from investing pros about how this game actually works.
Because learning about finance shouldn’t be boring.