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How To Make Money As Economic Growth Accelerates


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How To Make Money As Economic Growth Accelerates

Make Money As Economic Growth AcceleratesWith economic growth expected to accelerate during the second half of 2013 and into 2014, traders and investors that want to outperform the stock market indexes need to understand how to make money as economic growth accelerates.  There are certain stock market sectors that have historically done better than the overall stock market as economic growth accelerates.  While past investment performance is not a guarantee of future investment results, identifying patterns in the stock market that are correlated to the business cycle and investing accordingly can increase an investor’s chances of beating the stock market averages.

Why Economic Growth Is Expected To Accelerate in Late 2013 and 2014

The reasons why economic growth is expected to accelerate during the second half of 2013 and into 2014 are:

  • The United States Federal Reserve is expected to begin tapering their Quantitative Easing (QE) program in the fall of 2013.  While this is not likely to be a positive for growth as far as stimulus to the economy is concerned, it is an indication that the Federal Reserve believes the economy is strong enough to begin tapering and is ready for a period of accelerated economic growth, which many economists believe will exceed 3% during 2014.
  • Europe is rebounding from a long recession.  During the summer of 2013, economic indicators from Europe started to indicate that the over yearlong recession in Europe was finally coming to an end and a period of increasing economic growth is expected for later 2013 and 2014.  The combined European Union economy is the largest economy in the world, so if it starts growing, it will help bolster growth elsewhere, including the United States.
  • China is rebounding from an economic slowdown.  China was showing signs of faltering growth during the first half of 2013.  During the summer of 2013, economic indicators coming from China started to indicate that the pace of economic activity is picking up.  China is one of the largest economies and is one of the economic growth engines of the world.
  • Japan is still one of the largest economies in the world.  After nearly two decades of being mired in recessions and slow growth, Japan is showing signs of stronger economic growth during 2013, as the Japanese central bank adds stimulus to the Japanese economy and consumers in Japan increase their rate of spending.

Focus On Sectors To Make Money As Economic Growth Accelerates

Home ImprovementTo make money as economic growth accelerates, it is a good idea to look at stock sectors that traditionally perform well during periods of strong economic growth.  This includes energy companies, industrial companies, information technology companies, entertainment companies, and companies that generated revenue from home improvements.  The following is a rundown of the sectors that typically outperform during periods of economic growth acceleration, including leading stocks and Exchange Traded Funds (ETFs) in each of the sectors.

Energy producers do well during periods of accelerating economy growth because demand for energy products increases as industrial production and employment increases, and energy products often increase in price.  An ETF called Vanguard Energy ETF (NYSE:  VDE) derives its value from some of the largest energy companies in the world, such as Exxon-Mobil and Schlumberger.

Companies involved in industrial production typically outperform as economic growth picks up, due to increasing demand for their products throughout the economy.  An ETF called Industrial Select Sector SPDR (NYSE: XLI) is comprised of large industrial manufactures, such as General Electric and United Technologies.

Technology companies, also known as the tech sector, typically experience above-average growth as economic growth accelerates.  Technology upgrades that were put off during slower periods of economic growth are often implemented as economic growth picks up, increasing demand for products produced by technology companies.  Also, consumer spending on technology products increases as economic growth accelerates and consumers have more disposable income.  The Technology Select Sector SPDR (NYSE: XLK) ETF offers exposure to large technology companies, such as Apple, Cisco, and IBM.

Companies involved in the entertainment industry typically outperform other stock sectors as economic growth picks up.  Consumers spend more money on entertainment, as they feel better about their economic prospects and companies in the entertainment industry are the beneficiaries.  With companies such as Walt Disney and Starwood Hotels and Resorts, PowerShares Dynamic Leisure & Entertainment Portfolio (NYSE:  PEJ) is an ETF that can be used to play the entertainment industry.

While rising long-term interest rates appear to be increasing the costs of mortgages and putting a damper on the housing recovery, at this stage in an economic recovery home improvement stores and suppliers to the home improvement industry typically outperform the broader stock market, as homeowners use extra money to reinvest in their homes.  Investments in home improvement store companies such as Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD) are ways to expose a portfolio to the home improvement industry.

Keep An Eye On The Economic Growth Outlook To Book Profits

Make Money In StocksWhile stock traders are accustomed to looking for signs that the tide has turned to sell stock positions they are holding, stock investors may not be accustomed to selling medium-term investments that they are holding.  It is important to keep in mind that investments in sectors that outperform as economic growth accelerates should be medium-term investments and not held for an excessive amount of time.  There’s no point in riding positions up, as the economy increases in strength, only to see the gains evaporate, as the economic cycle eventually slows and recession takes hold.  Stocks typically decrease in price during recessionary times, as corporate profits decrease and a bear market sell-off sets in.

If healthy profits can be booked from investments made in sectors that outperform as the economy accelerates, it is a good idea to keep an eye on the outlook for economic growth for signs that a recession may be on the horizon and to book profits.

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