The Economic Cycle

Sam Stovall, the chief investment strategist for Standard & Poor's Equity Research divides the economic cycle into 4 stages:

Early recession. You should remember this stage vividly. Consumer sentiment ranges from fear to terror, industrial production plunges, interest rates peak and then start to fall, and unemployment begins to rise rapidly. Sectors that have done well -- relatively, at least -- during this stage include services, near the beginning; utilities; and, near the end of the stage, cyclicals and transports.

Full recession. Gross domestic product tumbles, interest rates keep falling, and unemployment rises. Sectors that do best during this stage, historically, have been cyclicals and transports, at the beginning of the stage; technology; and, near the end, industrials.

Early recovery. Consumer sentiment improves, industrial production turns up, interest rates hit bottom, and unemployment peaks and starts to move lower. Sectors that do best are usually industrials, near the beginning of the stage; basic materials; and, near the end, energy.

Late recovery. Interest rates rise as the central bank tries to control inflation, consumer sentiment heads down, and industrial production is flat. Sectors that have done well in this stage include energy and, near the end of the stage, consumer staples and services.

I agree with Jim Jubak that it's pretty clear that we're in the early-recovery stage, and will be making use of this current correction to load up either on commodities stocks or energy stocks once the correction bottoms/ stabilises.