If you were an investor in ancient Greece, you would have been smart to sell when the Parthenon was built…
Everything goes through cycles. Just look at the rise and fall of civilizations.
Famed Oxford historian Paul Kennedy made this case in his 1987 classic The Rise and Fall of the Great Powers.
Kennedy said great powers eventually overextend, which puts a strain on their economic base. Long-term decline soon followed.
Take Greece for example…
Greece arose in 1500 BC out of a group of small city-states. One thousand years later, it had expanded into the ancient world’s greatest empire.
At its zenith, the Greeks built one of the largest and most ornate temples of the time—the Parthenon.
It marked the peak of Greek civilization. From there, it was all downhill.
By 350 BC, the Greek empire had faded into a shadow of its former glory.
Now, imagine if you could take a time machine back to ancient Athens…
You see the grandness of the Parthenon as it’s erected. You’d probably think Greece was a good bet to last another 1,000 years.
Instead, the empire was in systemic decline. And Rome was the new kid on the block.
If you understood the rise and fall of great powers, you’d know the jig was up.
Greece. Rome. Britain. When they reached their peak, gravity brought them back down to Earth.
The same holds true for markets…
What Goes Up, Comes Down
Like civilizations, markets are cyclical. It’s just a fundamental law of nature… like gravity. What goes up eventually comes down.
As a company grows, it sees greater profits. It starts to expand, gobbling up the competition. At its peak, it builds the “supercenter”—the modern Parthenon.
But like an expanding imperial army, each new foothold in the market returns less and less. Competition picks up. Territory is exhausted. Prices drop.
Decline is inevitable.
You can see this happening with prehistoric retail dinosaur Sears.
At its peak in 2007, Sears had around 4,000 stores and made $53 billion per year in revenue. In 2016, Sears had 1,672 stores and $23 billion in revenue.
In 2007, Sears looked like a good bet to last decades.
Today, it’s a relic.
The cycle continues…
A new business “empire” replaces the old one. Out of Sears’ ashes arises Amazon.
Investors call this the “business cycle.” No one can predict when one cycle will end and another will begin.
But if you know which cycle the economy is in, you could potentially profit from it…
Six Stages of the Business Cycle
Per investment research firm Pring Research, there are six stages in the business cycle.
The business cycle is like a calendar year… But the seasons aren’t as predictable.
However, if you know which season (or “stage”) you’re in… you can find profitable opportunities.
Like any other cycle, there are winners and losers in each stage. You can see which assets do the best in the table below.
Source: Pring Research, and Intermarket Analysis by John J. Murphy
Based on the table, here’s what you should do in each stage:
- Stage 1: The economy starts to slow (buy bonds).
- Stage 2: The economy is in recession (buy stocks).
- Stage 3: The economy begins to recover (buy commodities).
- Stage 4: The economy expands (sell bonds).
- Stage 5: The economy peaks (sell stocks).
- Stage 6: The economy crashes (sell commodities and hold only cash).
Today, I’d put us at the end of Stage 4.
We’ve seen eight years of economic expansion. Like the Parthenon, the S&P 500 is at its zenith. There isn’t much room for it to push higher.
Now, we can’t tell you exactly when we’ll move into the next stage of the cycle, but you’ll know when we’re in it.
When stocks start to decline in a meaningful way, it’ll be a sign that we’ve entered Stage 5.
A good indicator would be the S&P 500 200-week moving average. If it dips below that average, it would suggest a cyclical shift is underway.
If you want to prepare now for a cyclical change, lighten up on your U.S. stock holdings.
The business cycle will continue. It’s just like the laws of nature. But in each cycle, some sectors will outperform others.
Tomorrow, we’ll show you which stocks perform best in each stage.
Regards,
Nick Rokke, CFA
Analyst, The Palm Beach Daily
CHART WATCH
Commodities are on a tear…
Based on the business cycle, commodities are a good bet right now. Gold and silver prices have risen 10% over the past year.
One of the best-performing commodities over this span is iron ore. Nearly 98% of all iron ore is used in steel production. So it’s a good indicator of the economy’s health.
As you can see in the chart below, iron ore doubled from its low in May.
If the economy is doing well, the price of steel and iron ore go up. And prices are shooting higher.
—Nick Rokke
MARKET BRIEFS
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MAILBAG
Warren J.: I like the new format. It’s more readable and always interesting…
In regards to Doug Casey’s recent essay, I do think Doug may have forgotten the old saw about getting more conservative as we age. I see a swing to the Republican side as the “baby boomer” population increases. And that may keep original American values intact. At least I hope so.
David R.: At this moment I am just trying to absorb all of the information that I have received from Tom Dyson and Mark Ford. I am also in the process of reading Mark’s book The Pledge.
This is all very new to me. I have no investing experience and never bought any stocks. However, the one investment strategy that really caught my attention was the Legacy Portfolio. How do I start, and which are the best companies to invest in? Thank you.
Editor’s Reply: Hi, David, and thanks for the message. All Legacy subscribers have access to the Legacy user guide. The guide contains everything you need to start Legacy investing, including frequently asked questions, past issues, updates, the portfolio, calculators, and much more.
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