BUSINESS CYCLE HAS AN

IMPACT ON INVESTMENT
PRODUCTS

-FINPRO
ROLL NAME
NO .
01 BHAKTI AMBRE
03 BHAGYASHREE BHAGYAVANT
07 SHUBH CHANDRA
11 SAYALI GADGE
32 AMAN PANCHAL
35 SHANTANU PATIL
46 AMAN YADAV
47 RAHUL YADAV
BUSINESS CYCLE
IMPACT OF BUSINESS CYCLE ON INVESTMENT

• A business-cycle expansion generates higher interest rates and a surplus of capital that prompts a
decrease in investment and a business-cycle contraction.
• A contraction then generates lower interest rates and a shortage of capital that prompts an increase
in investment and a business-cycle expansion.
 What is an Investment Product?
An investment product is a product offered to investors based on
an underlying security or group of securities that is purchased
with the expectation of earning a favorable return. Investment
products are based on a wide range of underlying securities and
encompass a broad range of investment objectives.
 INVESTMENTS IN THE EARLY CYCLE

• Since 1962, stocks have delivered their highest performance during the
early cycle, returning an average of more than 20% per year during this
phase, which has lasted roughly one year on average.
• Stocks have typically benefited more than bonds and cash from the
typical early cycle combination of low interest rates, the first signs of
economic improvement, and the rebound in corporate earnings.
• Stocks that typically benefit most from low interest rates—such as those
of companies in the consumer discretionary, financials, and real
estate industries—have outperformed. Consumer discretionary stocks
have beaten the broader market in every early cycle since 1962.
 INVESTMENTS IN THE MID-CYCLE

• As growth moderates, stocks that are sensitive to interest rates and

economic activity have historically still performed well, but stocks of
companies whose products are only in demand once the expansion has
become more firmly entrenched have also delivered strong returns.
• Annual stock market performance has averaged roughly 14% during the
mid-cycle. Bonds and cash have typically posted lower returns than
stocks but the difference in returns among the 3 has historically not been
as great as during the early cycle.
 INVESTMENTS IN THE LATE CYCLE
• The late cycle has historically lasted an average of a year and a half,
with the overall stock market averaging an annualized 5% return.
• As the recovery matures, inflation and interest rates typically rise, and
investors shift away from economically sensitive assets.
• Higher inflation typically weighs on the performance of longer­
duration bonds.
• Energy and utility stocks have done well as inflation rises and demand
continues.
• Cash has also tended to outperform bonds, but investors should be
cautious about making changes to their asset allocation in pursuit of
opportunities during the late cycle
 INVESTMENTS IN RECESSION
• Recession has historically been the shortest phase of the cycle, lasting slightly
less than a year on average and stocks have performed poorly with a −15%
average annual return.
• Interest rates typically fall during recessions, providing a tailwind for
investment-grade corporate and government bonds, which have outperformed
stocks in most recessions.
• As growth contracts, stocks that are sensitive to the health of the economy lose
favor, and defensive ones perform better.
• These include stocks of companies that produce items such as toothpaste,
electricity, and prescription drugs, which consumers are less likely to cut back
on during a recession.
• In a contracting economy, these companies’ profits are likely to be more stable
than those of others.
 INVESTMENTS IN RECESSION

• High dividends paid by utility and health care companies have helped their
stocks during recessions.
• Interest-rate-sensitive stocks including those of financial, industrial,
information technology, and real estate­companies typically have
underperformed the broader market during this phase.
• While every business cycle is different, an approach to investment analysis
that identifies key phases in the economy and looks at how investments have
performed in those phases in the past may offer investors guidance as they set
expectations for their portfolios.
 KEY TAKEWAYS

 Economic conditions may affect investment performance.

 Measures of economic activity have historically risen and fallen in a
pattern known as the business cycle.
 The business cycle contains 4 distinct phases: early, mid, late, and
recession.
 History offers guidance as to how various types of investments might
perform during each phase.
THANK
YOU