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How To Position Your Portfolio For An Economic Recovery

Take advantage of the economic recovery by buying at the bottom of the market.If you watch financial television, things look bleak.

The unemployment rate is at 9.9% and the Dow has dropped below 10,000. It looks like the world is coming to an end as we know it.

Although it may not feel like it at the moment, the United States is actually in the midst of an economic recovery. The majority of companies are reporting great earnings and GDP is growing. The consumer is slowly reemerging and job growth is on the horizon. It may not be a typical V-shaped recovery, but the economy is bouncing back.

The question is: How can you benefit from improving economic conditions? Market bulls should look to add exposure in the following areas to your investment portfolio.

Cyclical Stocks

Cyclical stocks perform their best during times of economic expansion. These stocks skyrocket during times of economic prosperity and drop like a rock during economic lulls. Manufacturing companies, equipment suppliers, and basic metal producers are the best businesses to invest in during boom periods.
These companies will benefit the most from continued economic production ramping up globally. Industrial production is not just on the rise in the US. It is increasing in China, Japan, South Korea, and India. If these trends continue companies like Posco (PKX), Caterpillar (CAT), Deere (DE), and US Steel (X) should benefit. North American and Asian cyclical stocks are the best places to invest to take advantage of a recovery.

Energy Stocks

Energy is a sector that is sure to benefit from any economic recovery in the US or abroad. Investors looking for oil and gas exposure can add a major integrated oil company like Exxon (XOM), Shell (RDSA), or Hess (HES). These companies perform particularly well when oil prices are rising. It looks like forces are setting up for a rise in oil prices later this year. The following factors bode well for an increase in energy prices.

  • An economic recovery will lead to increased demand for oil globally.
  • A potential ban on offshore drilling will reduce the available supply of oil
  • A bad hurricane season threatens to disrupt oil supplies
  • Investors not averse to risk may want to take a look at alternative energy companies. Wind, solar power, water, or coal could all be the future of US energy. The best way to buy all of these forms of alternative energy is by investing in an exchange traded fund like the PowerShares Cleantech ETF.

    Small Cap Stocks

    Small cap stocks tend to do very well coming out of economic recessions and depressions. Small caps have dropped recently since their run up from the March lows of 2009. The Russell 2000, which measures the performance of small cap stocks, was down 7.6% for the month of May. Small caps are the best investments for young investors because they have the greatest chance of attaining multibagger status. A multibagger is a stock that increases two, three, five or even 10 times its original value. Who wouldn’t love to discover the next Apple Inc. in its early growth stages?
    The market is offering some compelling small cap values. Companies like Buffalo Wild Wings and Blackboard, Inc. are trading at price to earnings ratios below their projected growth rates.

    Bonds

    As I wrote in a previous post, bonds have a place in the young investor’s portfolio. But don’t worry! You still have time before you need to rush out and add any bonds for your portfolio.

    The discount rate is currently 0.50% which means that rates on savings, money market accounts, certificates of deposits, and bonds are relatively low. This will not last forever however. It is expected that the Federal Reserve will start raising interest rates in 2011. Corporate bonds will become a much more attractive option when rates are higher. Bonds will offer superior returns when the Federal Reserve starts tightening.

    Do you think that the economy is in recovery mode or headed for a double dip recession? How are you currently positioning your portfolio based on your outlook?

Comments

  1. I think those are fantastic areas to focus on. It’ll make for a balanced portfolio, so you can capitalize fully on the recovery.

    However, I don’t think we’re quite at our low, yet. My thought is we rise from here through the Summer and then see another decline begin in the Fall. Possibly down to the low of March ’09.

    As a result, I’m currently getting into a few vertical option spreads in the tech, minerals, and energy areas. The spreads will help protect my portfolio if my call is wrong.