An economic recovery is a great time to invest. When the economy is booming, companies are earning more money, making investments in their stocks more valuable and investments in their bonds more secure. But as in any market environment, there are investments that work out better than others during an economic recovery. Sit down with your financial advisor and see which of these economic recovery plays fits in best with your investment objectives and risk tolerance.
Last updated: Aug. 2, 2021
Chemical and Basic Materials Stocks
Cyclical stocks are those that are particularly sensitive to the ups and downs of the economy. As such, they can be particularly good buys at the start of a new economic cycle. Companies that produce chemicals and materials like steel tend to boom during an economic recovery, as demand for their products from consumers and businesses alike skyrockets. Since the stock market tends to look six months in advance to determine its valuation, it can pay to hop into cyclical stocks right before the economy turns hot.
S&P 500 Index
The S&P 500 index tracks the performance of the largest companies in America, so it only makes sense that when the economy is booming, many of the S&P 500 companies will also see rising profits and stock prices. The S&P 500 index is also one of the easiest investments to buy, as you can buy a no-load mutual fund or no-commission exchange-traded fund to get access to all of these companies with a single purchase.
High-Yield Corporate Bonds
High-yield bonds, also known as junk bonds, are issued by companies with below-average credit ratings. In exchange for the greater risk to investors, high-yield bonds pay above-average market yields. While generally a risky play, high-yield bonds can be good to buy at the onset of an economic recovery, as rising earnings reduce the risk the companies will default on their bonds. The combination of reduced risk and high yields can make these types of bonds a good play for risk-tolerant investors during an economic recovery.
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Information Technology Stocks
Information technology is one of the main drivers of a thriving economy. When companies are growing, they need to expand their communications and technological capabilities, and info tech stocks are the prime beneficiaries. Companies that fall into this category include those producing computer chips, servers and workplace management systems. Consumer technology companies also gain during an economic recovery as consumer spending also picks up.
Typically, the Fed helps kick-start economic growth by keeping interest rates low until business conditions improve. As the economic cycle evolves, interest rates tend to climb higher. This makes long-term bonds a bad place to be during an economic recovery, as rising interest rates drive down bond prices. However, if you invest in short-term bonds, as they mature you can reinvest the proceeds into higher market rates. You can repeat this process until interest rates peak, at which point you’d be better served by locking in those higher rates with longer-term bonds.
When an economy is recovering, it means that more goods and services are being produced. However, unless they go to market, products can’t generate any sales. Without trucks, rail cars, cargo planes and other forms of transport, the economy will stop dead in its tracks. Since the services of transportation companies are an absolute essential requirement to a growing economy, their stocks are typically good buys at the start of a recovery.
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If you want to get in early on an investment that may turn higher, take a look at international stocks when the American economy begins to recover. Typically, the U.S. leads the world out of global recessions, so once the American economy has turned, the world is likely to follow. You’ll have to do some homework in this area, as not all foreign economies will recover at the same speed, or even at all. But buying international stocks when foreign economies are still at the tail end of their recessions can be a way to get ahead of their eventual recoveries.
Real estate prices can take a hit during an economic recession, but when the economy recovers, housing prices typically jump as well. As the unemployment rate falls and consumer confidence rises, demand for houses tends to go up, driving up prices. Buying a house as an investment to benefit from an economic recovery doesn’t make sense for everyone, as housing is illiquid. However, you can buy real estate investment trusts on the stock exchange to benefit from recovering real estate prices — just be sure you know what your particular REIT owns. The start of an economic recovery can also be a good time to buy a house for your own personal use if you happen to be in the market.
Travel and Leisure Stocks
Travel and leisure companies fare poorly during economic recessions, as consumers tend to curtail their discretionary spending during uncertain times. However, when the economy recovers, pent-up demand often drives vacation spending. This can result in big gains for hotel and cruise line stocks, for example, in addition to online travel agencies. Airline stocks also tend to rise during economic expansions, as both consumer and business travel picks up.
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When the economy is booming, employers need additional workers. Wages often rise during economic recoveries as well. If you want to position yourself for financial success in this type of environment, it can pay to invest in yourself by polishing up your resume, taking additional classes or doing whatever it takes to make yourself attractive to high-paying employers. As your future earning potential is your greatest asset, taking the time to invest in yourself can pay off in the long run even more than buying stocks or bonds.
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