Reading The Business Cycle Tea Leaves
- Alan Lavine and Gail Liberman
Although Lakshman Achuthan, economist and author of "Beating the Business Cycle (Doubleday)," is bullish on the economy, he believes cash is king right now.
Cash includes investments such as money market funds, U.S. Treasury bills and short-term CDs.
"We're in an expansion," says the author, who discusses how to profit from turning points in the economy. "We're at the stage of the recovery where we are transitioning from the acceleration to the deceleration phase of the current expansion--that is growth is going to slow, but no new recession is on the horizon."
Achuthan is managing director of the Economic Cycle Research Institute, New York, which measures its own series of objective indexes to provide forecasts for leading policymakers.
To make bond investment decisions, he uses a "Future Inflation Index," which anticipates pressure on interest rates by summarizing the best leading indicators for economic growth. Based on this index, which examines factors such as consumer prices, now is not the time to invest in bonds.
"Bonds aren't the best place to be invested when the Future Inflation Gauge (FIG) is rising, as it has been since late 2000," he says.
"Stocks are not likely to surge ahead if the economy is set to slow, as the 'Weekly Leading Index' has been suggesting for a few months now," he adds. "The Weekly Leading Index, which summarizes the best leading indicators of economic growth, such as mortgage applications and corporate profit margins, anticipates upswings and downturns. These indicators, he says, typically increase before the economy does.
As a result, he says, "cash looks better in the near-term."
Achuthan, also says it is a good idea to look at the price of homes when making investment decisions. Home prices still are rising, but not as fast as in the past year.
Historically, the business cycle goes from boom to bust about every three years. Meanwhile, stocks register three good years for every bad one.In the 1990s, however, we had boom times for over six years.Business cycles can give you an idea of when to invest, but it is not the Holy Grail. This business cycle can be very different from the average. So don't bet the ranch on any one type of investment.
Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).
To read more columns, please visit the column archive.