CFA Level 1

AAA

Equity Investments - Life Cycle Analysis: The Business Cycle

There are 5 primary stages of a business cycle:

  1. Recession
  2. Recovery
  3. Early Expansion
  4. Late Expansion
  5. Slowing into Recession
Chart 1: Business Cycle Diagram

1) Recession
The recession stage is described as the bottom stage of the cycle. It is characterized as the stage ahead of recovery. In this stage, the Fed will expand the money supply in order to stimulate growth. Attractive investment opportunities in this stage include investments such as commodities and stocks.

2) Recovery
The recovery stage is characterized as the stage after recovery. The economy is starting to "recover" after the recession; the Federal Government's moves to stimulate the economy begin to have an affect. In this stage, attractive investment opportunities include investments such as cyclical investments and commodities.

3) Early Expansion
The early expansion stage is a continuation of the recovery stage, where the recovery begins to gain momentum. In this stage, attractive investment opportunities include investments in the overall stock market and real estate.

4) Late Expansion
The late expansion stage continues on after the early expansion stage. In this stage the expansion momentum continues and investor confidence is strong. Attractive investment opportunities in the late expansion stage include investments in bonds and interest sensitive investments.

5) Slowing into Recession
This stage occurs after the expansion phase and is the stage where the economy begins to show signs of slowing down and even turning negative. In this stage, attractive investment opportunities include investments in bonds and interest sensitive investments.

Life Cycle Analysis: The Industry Life Cycle
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