Course index:
- Basic Concepts of Money and Personal Finance
Introduction to the value of money, the importance of saving, and spending control. - Budgeting and Financial Planning
Create a personal budget, manage income and expenses, and set financial goals. - Inflation and Purchasing Power
Explanation of how inflation affects the value of money over time. - Interest Rates and Time in Finance
Differences between simple and compound interest rates and their importance in investments. - How to protect your savings. Protect yourself from scams.
How to protect your money from the scams that abound today - Basic Savings Instruments
Explanation of savings accounts, term deposits, and how they work. - Introduction to the Stock Market
Basic concepts of the stock market and its role in the global economy. - Actions: What They Are and How They Work
Explanation of stocks, types (common and preferred), and how to invest in them. - Bonds: What They Are and How They Work
Differences between corporate and government bonds, and their importance in diversification. - Risk vs. Return on Investments
Concept of risk and how it affects investment choices. - Diversification and Creation of Basic Portfolios
Basic diversification principles to reduce risk in an investment portfolio. - What is an ETF and How Does it Work?
Introduction to ETFs (exchange-traded funds) and how they track market indices. - What is a Mutual Fund?
An explanation of mutual funds and their benefits for beginners. - Financial education for the family
All the information you need to make ends meet. - Economic Cycle and its Impact on Investments <<<<<<<<<<<<<<<<<<<<<<<<<<<<
How the stages of expansion and contraction in the economy affect investments. - Growth Stocks vs. Value Stocks
Differences between these types of actions and when each is appropriate. - Fundamental Analysis of Stocks
Explanation of how to analyze a company's value based on its fundamentals. - Basic Technical Analysis: Charts and Patterns
Introduction to basic technical analysis tools, such as trend lines and candlestick patterns. - Options: What They Are and How They Work
Basic concepts of call and put options and their uses in investments. - Futures: What They Are and How They Work
Introduction to futures contracts and their application in investment and speculation. - Introduction to Cryptocurrencies
What is digital money, how it was created, and the characteristics of Bitcoin and other cryptocurrencies. - Blockchain and its Importance in Finance
How the technology behind cryptocurrencies works and their applications in finance. - Risks in Cryptocurrency Trading
Volatility, fraud, and regulations in the cryptocurrency market. - Leverage Principles and its Risk
What it means to trade with leverage and the associated risks. - Investor Psychology and Emotion Management
How emotions influence investment decisions and tips for managing them. - What is Algorithmic Trading
Basic explanation of the use of algorithms to perform operations in the financial market. - Financial Analysis of Companies
Introduction to basic financial statements and their interpretation for valuing companies. - Investing in Commodities: Gold, Oil, and Other Goods
How commodity investments work and their role in diversification. - Advanced Investment Strategies: Hedging and Derivatives
Introduction to strategies for managing risks through financial derivatives. - Creating and Managing a Complete Portfolio
Practical application of prior knowledge to build and manage a diversified portfolio.
The world of investments isn't static: it rises, falls, accelerates, and slows down, as if it were breathing. This happens because the economy has its own rhythm, something experts call the "business cycle." Understanding this cycle is key to knowing how to manage your money, whether you invest in stocks, bonds, or any other instrument.
In this article, we'll explore what the economic cycle is, its stages (boom, peak, recession, and recovery), how you can adjust your portfolio according to each phase, and which sectors tend to benefit from each phase. You don't need to be an economist to take advantage of this: with a little attention, you can use the cycle to your advantage and make smarter investment decisions.
What is the business cycle?
The business cycle is like a roller coaster that the economy rides over and over again. It doesn't happen by chance, but rather responds to how things move in the world: how much people spend, how companies produce, what governments do with interest rates, and how trade between countries is doing. This cycle has four main stages: expansion, peak, recession, and recovery. Each has its own characteristics, and what happens in the economy directly affects your investments, because the value of stocks, bonds, or even gold depends on how things are at that moment.
Not all cycles are the same. Some last for years, others are shorter, and sometimes there are unexpected shocks, like a pandemic or an international crisis. But, in general, the economy always goes through these stages, and knowing which one we're in helps you prepare. For example, when everything is growing and there's work, companies earn more and stocks rise. But when things slow down, people spend less and some businesses suffer. Let's look at each stage in detail and how you can take advantage of them.
Stages of the economic cycle: expansion
The first stage is expansion, which is when the economy is at its best. Here, everything seems to be going up: companies are selling more, hiring more people, unemployment is falling, and salaries are rising. People have more money in their pockets, so they spend it on houses, cars, travel, or whatever. Banks are lending more easily because there's confidence that everything will continue to be good. It's as if the economy were at a party: everyone is happy, and there's movement everywhere.
At this stage, investments tend to thrive, especially those related to growth. Shares of large or technology companies rise because they're earning more and investors want to get in on the action. For example, if you're in Argentina and look at the American market, companies like Apple or Mercado Libre tend to shine in expansion, because people are buying cell phones and making more online purchases. It's also a good time for real estate, because house prices rise when there's money in circulation.
But not everything is perfect. Because there's so much enthusiasm, sometimes the prices of things (inflation) start to rise. Central banks, like Argentina's or the Federal Reserve in the United States, can raise interest rates to cool things down a bit. This affects bonds: if rates rise, old bonds become worth less, because new ones pay more interest. In short, expansion is a time to take advantage of growth, but also to watch for signs that the party may be over.
Stages of the economic cycle: peak or stagnation
After the boom comes the peak, which is like the highest point on a roller coaster before it begins to decline. Here, the economy is at its peak: companies can't produce any more, unemployment is at its lowest, and prices (inflation) can be skyrocketing. Everything seems great, but that's precisely why it starts to get complicated. When there's no more room to grow, things overheat. Companies have trouble finding workers, costs rise, and people start spending less because everything is expensive.
At the peak, investments become riskier. Stocks may be at sky-high prices, but there's a chance they could start to fall if the economy slows down. It's as if the market were inflated: everyone wants to jump on the bandwagon, but some are already thinking about getting off. Bonds also suffer, because interest rates are usually high to control inflation, and that makes investors prefer cash or safe havens. At this stage, those in the know closely watch the signs: if the government or the central bank starts tightening too much, the peak could be a warning that a downturn is coming.
Stages of the economic cycle: recession
The recession is the tough part of the cycle. Here, the economy slows down: companies sell less, lay off people, unemployment rises, and confidence plummets. People spend only what's necessary because they don't know if they'll have a job tomorrow. Banks lend less because they're afraid they won't get paid, and interest rates may drop to try to revive things. In Argentina, recessions tend to be severe, with high inflation and lower consumption, something we saw in crises like the one in 2001 or in more recent years.
For investments, a recession is a difficult time, but it's not all bad news. Stocks tend to fall, especially those of companies that depend on people spending, such as clothing or cars. But it's also an opportunity: if you're patient, you can buy cheap and wait for things to improve. Bonds, on the other hand, can be a good move, because low rates cause them to rise in value. And things like gold or the dollar tend to shine, because people seek refuge when everything is uncertain. It's a time to be cautious, but also to look for bargains if you know how to wait.
Stages of the economic cycle: recovery
Fortunately, after the recession comes recovery. Here, the economy is starting to pick up: companies are selling again, hiring again, and confidence is slowly returning. Interest rates tend to be low because governments want to help, and that keeps money circulating more. It's like when the sun begins to rise after a storm: not everything is perfect, but you can see the light at the end of the tunnel.
In the recovery, investments begin to flourish again. Stocks that fell during the recession usually rebound, especially those of strong companies that survived the tough times. It's also a good time to get into sectors that grow when the economy picks up, such as construction or manufacturing. Bonds may lose some of their appeal if rates start to rise, but there are still opportunities. This is a time to take risks again, but with caution, because the economy is still getting back on its feet.
How to adapt the portfolio in different phases of the cycle
Now that we understand the stages, let's look at how you can adjust your portfolio to take advantage of each one. There's no magic formula, because it depends on how much risk you're willing to take and how much money you have, but there are general ideas that work. The key is to diversify (not put all your eggs in one basket) and be ready to move at the right time.
During the expansion, focus on growth. Stocks are king here, especially tech and consumer stocks, like those on the Nasdaq (think of the QQQ ETF we saw earlier). If you're in Argentina, you can also look at local stocks like banks or energy companies, which rise when there's optimism. But be careful with inflation: having a little cash or inflation-adjusted bonds (like the CERs in Argentina) protects you if prices skyrocket. The idea is to take advantage of the rise, but not go crazy buying everything at the end, when prices are already high.
At the peak, start being more cautious. Stocks may continue to rise, but the risk of a fall increases. Here, you can sell some of what has already gained a lot and move into safer assets, such as short-term bonds or cash. It's not about running away, but rather reducing risk in case the roller coaster starts to decline. If you own gold or dollars (like the GLD ETF), they're also a good reserve because they tend to hold their own when things get tough.
In a recession, the priority is to protect your money. Stocks fall, so if you can, wait until the worst months are over before buying. In the meantime, government bonds (especially if rates have fallen) are a safe haven. In Argentina, dollar-denominated or inflation-adjusted bonds can be an option because they protect your purchasing power. Gold also shines here, and if you have cash, save it to take advantage of low prices later. It's a time to be patient and not panic: recessions pass, and those who buy cheap profit later.
In the recovery, take risks again, but do so calmly. Stocks that fell during the recession are starting to rise, so you can invest in ETFs like the SPY or in solid, cheap companies. It's also a good time for sectors that grow when the economy picks up, such as construction or raw materials. Bonds lose some appeal if rates rise, but you can still hold some to balance them out. The key here is to get in slowly and not rush too much, because the recovery can be slow at first.
Sectors that thrive at different economic stages
Not all sectors of the economy move equally at each stage of the cycle. Some shine when everything is growing, others withstand crises, and others rise when things improve. Knowing this helps you choose where to invest your money at the right time.
In the expansion, the sectors that are breaking even are consumer discretionary (things people buy when they have extra money, like cars, clothing, or travel) and technology. Companies like Nike, Toyota, and Mercado Libre tend to gain a lot because people are spending without fear. Construction and real estate also rise because there are more loans and projects. If you invest in ETFs, the QQQ (technology) or the XLY (consumer discretionary) are options to watch.
At the peak, things are mixed. Consumer staples (food, medicines, cleaning products) begin to gain strength, because people continue to buy them even when everything is expensive. Companies like Arcor and Procter & Gamble are holding up well. Utilities (electricity, gas, water) are also stable, because these are non-negotiable necessities. The XLP ETF (consumer staples) or the XLU ETF (utilities) could be interesting here.
In a recession, defensive sectors are the winners. Consumer staples remain strong because people don't stop eating or using soap. Healthcare is also resilient, because medicines and doctors are not avoided even during a crisis. Think of companies like Laboratorios Bagó or Johnson & Johnson. Utilities are also holding up because we all continue to pay for electricity. If you want to invest, gold (GLD) or government bonds are classic safe havens, and defensive ETFs like XLV (healthcare) are a good choice.
In the recovery, cyclical sectors shine again. Industry (factories, machinery) and raw materials (steel, oil) grow when the economy picks up. Companies like Ternium and YPF can rebound. Construction also thrives, because there are more projects. Banks and financial institutions (like Banco Galicia and Visa) gain when lending resumes. The XLI (industry) or XLB (raw materials) ETFs are options to invest in here.
A practical example to understand it
Let's imagine Sofia, who has 500,000 pesos to invest. During the boom, she invests 300,000 in QQQ (technology) and 100,000 in Mercado Libre stocks, leaving 100,000 in cash. She earns 201% of the QQQ in a year because everything is rising. At the peak, she sees rates rising and sells half of the QQQ, shifting 150,000 to CER bonds for protection. During the recession, the remaining QQQ falls 151% of the QQQ, but bonds rise, and the cash allows her to buy cheap SPY. During the recovery, the SPY grows 251% of the QQQ, and Sofia ends up with more than 600,000 pesos, adjusting her portfolio at each stage.
An important warning
Many investors try to predict whether a recession or a peak is coming and move all their money accordingly, but getting it right is like flipping a coin. If you think a recession is coming and sell everything, but the economy continues to grow, you miss profit opportunities. Or if you invest everything in stocks hoping for a recovery and find yourself in a prolonged recession, you can end up with significant losses. This uncertainty makes relying solely on speculation risky, which is why many experts suggest focusing on a long-term strategy rather than trying to ride every wave of the cycle.
Conclusion: Using economic cycles to your advantage
The economic cycle isn't something you can avoid, but you can learn to navigate it. Its stages (boom, peak, recession, and recovery) affect everything from the value of your stocks to how much you pay in interest. Adapting your portfolio accordingly helps you take advantage of the upswings and protect yourself during the downswings. And knowing which sectors thrive at each stage (expanding technology, healthcare in recession, recovering manufacturing) gives you an advantage when choosing where to invest. You don't have to be a genius: with patience and a little strategy, the economic cycle can be your ally in growing your investments.
Next course date
Questions for you to reflect on
Does it make sense to worry about business cycles?
How can these cycles be predicted?
How does my investing approach change over cycles?
A brief overview of The Pocket Investor
The Pocket Investor is a project that combines experience and passion for financial education to help you transform your relationship with money. Through personalized mentoringWe help you design investment strategies tailored to your goals and needs, optimizing your portfolio to address challenges like inflation and the dollar.
The books on finance and investment, including the popular The Argentine Pocket Investor - El Inversor de Bolsillo argentino, are practical tools that explain complex concepts in a simple way, bringing the world of investments closer to anyone interested in financial growth.
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