Cocktail Economics: Discovering Investment Truths from Everyday Conversations

Chapter 5. Putting High-Beta to Work: Industry-Based Portfolio Strategies

Any number of different economic shocks can deliver the same economic results. For example, a tax cut might initiate a sustained increase in the stock market, or what is commonly known as a bull market. So might lower inflation. So might a string of interest-rate cuts from the Federal Reserve. But each of these bull markets is not the same. In particular, the shocks that generate these markets draw out different responses from individual industries. And elasticity is the reason why.

In a way, shocks seek out sensitivity—or high-beta, or inelasticity, which are all interchangeable terms in this discussion. Our challenge, then, is to connect specific shocks with their most ...