Investors consider where to place bets as recovery looms
— -- Successfully investing in the recovery means more than just being in the market at the right time. It means being in the right places, too.
As investors get more confident that the economy is on the mend, a key to success will be which industries are best positioned to cash in on the recovery.
Some investors are already planning ahead, handicapping which sectors will stand to be the future winners in this fledgling economic healing process.
"The worst thing to do is shoot where the rabbit was," says Sam Stovall, chief investment strategist at Standard & Poor's.
So far, stocks are following an almost textbook pattern of recovery. The ones that are most exposed to the economy's ups and downs, especially financial services and technology companies, were the first stocks to perk up as investors anticipated the recession would end.
Now that investors are wagering on actual economic growth in the second half of the year, they're also making big bets on so-called consumer discretionary companies that make large-ticket items such as cars and appliances.
To figure out which sectors will be the future winners, though, investors are applying several techniques including:
•Studying the past. Since 1945, certain sectors have enjoyed their best times during particular points in an economic recovery, Stovall says. Individual businesses tend to do better at certain points of an economic cycle and investors anticipate these changes in business, he says.
If the past is to be trusted again, that means investors should expect solid performance this year not only from consumer discretionary stocks, but also makers of materials and industrial companies. These sectors are known as cyclicals, because they are closely tied to the fortunes of the economy.
The reason is simple: Companies that manufacture products will start using up their inventory as demand picks up. When that happens, these companies need to order metal, chemicals and other materials to create more goods to sell.
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