The word is that the recession is over. And with bulls enthusiastically making a run at Dow 10,000, there are thoughts of economic recovery. While it is important to consider that volatility is still a part of the equation, and understanding that this economic recovery is supposed to be a rather gradual one, it is nonetheless time to start considering strategy for an economic recovery, as you move out of your recession investing strategy. (If you are all about the index funds, chances are your strategy is set: Keep doing what you are doing.) There are different considerations involved when determining where to invest as things to start to pick up. Here are some things to consider as you begin planning your recovery investment strategy:
Past economic recoveries
Many investors and economists are noting the similarities the current recession has to past recessions. Looking to see what sectors and types of companies have done well at different points in an economic recovery can be helpful. Understanding the cycle, and where different companies fit into that cycle are quite useful. Industrial and materials companies generally pick up early an economic recovery cycle, and energy stocks often follow later.
Of course, the past cannot predict future results, and things may go differently this time, no matter how closely things appear to be adhering to the past so far. You can use the past to help you find patterns and possibilities, but it is important to be wary of relying wholly on the past.
Another thing to look at is revenue growth. Many companies reported a profitable third quarter for 2009, but that doesn’t necessarily mean that revenue is up. Indeed, in many companies, revenue remained down. Many profits were the results of lay-offs and other cost-cutting measures. What you want to look for are companies that are starting to see increases in revenue, and that have stopped being so big on cutting costs.
This is where a focus on financials might help. The financial sector was hard-hit, and there are many stock bargains out there. Additionally, as things start to improve, businesses and individuals are expected to start looking for financing, bringing interest revenue to financial companies. And don’t forget that some financial sector companies, notably credit card companies, are actively looking for way to raise revenue through such things as interest rate hikes, increased fees and new fees.
Government projects and economic stimulus
The economic stimulus package passed earlier this year sets aside money for specific goals and projects aimed at creating jobs. Additionally, the government is also focusing on upgrading the road system and pushing alternative energy and improving the power grid. These focuses are likely to lead to more income for infrastructure companies (including those that concentrate on Internet and wireless infrastructure), as well as some alternative energy companies. As the economic recovery gathers steam, it is possible that companies connected to government projects and connected to economic stimulus money will see gains on the stock market. Getting in now could be a way to ensure profits in your investment portfolio.
This particular economic recovery may not be kind to companies that rely on consumer spending. Many consumers have been shaken by what is being called the “Great Recession.” There has been a shift toward frugality, and many consumers have curbed the free spending habits that marked the run-up to the financial crisis. Additionally, even though the government has tried to promote projects that provide jobs, the employment picture remains relatively weak. With expectations of a “jobless recovery” it is unlikely that consumers will even have the funds to spend a great deal. That means that, even with the holiday shopping season coming up, retailers and the travel industry may lag behind.
You might also consider DRIPs moving forward, which can help you build an income stream while protecting you somewhat from the next crash. Of course, this is just speculation. In the end, you have to decide what you think is most likely to happen as the economy recovers. But looking at the patterns and possibilities can increase the likelihood that you choose a few winning investments that can offer you some solid investment portfolio growth.