How to be a late-cycle investor

Every business cycle is different, but history tends to repeat itself with general trends and cyclical fluctuations.

The current economic expansion is now more than three times the average length at 117 months and that means we are approaching the latter stage of this cycle. That doesn’t mean it will end any time soon, but eventually conditions will change.

A late-cycle phase is typically defined by a slowdown in growth, low levels of unemployment,  rising inflation and a flattening yield curve.  You may see earnings growth slow and profit margins shrink. Some of these things are starting to emerge, though not all  – earnings growth is strong, but inflation is notably absent.

But when the economy eventually fluctuates your investments will fluctuate too. But rather than worrying about where we are in the business cycle, it is far better to pay attention to companies.  Historically, late-stage and defensive sectors include healthcare, energy, utilities and consumer staples outperform.

Those with well-defined businesses, who are leaders in their industries with a history of profitability and steadily rising dividends will do best.  These companies thrive in all conditions and fall least and recover first when conditions improve again.

You might like:  RRSPs vs. TFSA: which is better?