This month, Jason Weaver discusses the business cycle, factor investing and P/E ratios.
Business Cycle
There are four phases to the business cycle.
Early (Recovery)
Activity Rebounds (GDP, Employment, Income)
Credit begins to grow
Profits grow rapidly
Stimulative policy
Improving sales & low inventory
Mid (Expansion)
Growth peaking
Credit growth strong
Profit growth peaks
Neutral policy
Inventories & sales grow
Late (Slow Down)
Growth moderating
Credit tightens
Earnings under pressure
Contractionary policy
Inventories grow and sales growth falls
Recession (Contraction)
Falling activity
Credit dries up
Profits decline
Policy eases
Inventories & sales fall
Factor Investing
Value
Stocks discounted relative to their fundamentals
Early Cycle
Momentum
Stocks with upward price trends
Mid Cycle
Minimum Volatility
Stable, lower risk stocks
Late Cycle
Quality
Financially healthy companies
Late Cycle
Size
Smaller, high-growth companies
Early Cycle
P/E Ratios
Widely used ratio for valuing companies by comparing share price to earnings
Higher P/E ratio shows investors are willing to pay more today because of growth expectations
Low P/E ratio might indicate that stock price is low relative to earnings
P/E ratios vary by factor and sectors
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