The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Says Who? Says Goldman Sachs

Timing is everything in investing. Success is often determined not only by what you own, but when you own it. You can buy a stock for all the right reasons and still lose money because you were out of synch with the economic cycle, which can be more profound than seasonal patterns. This is critical because certain stock market sectors work best at different ISM stages. Cyclical sectors—energy, materials, and industrials—usually do best when the economy is growing. Defensive sectors—healthcare, staples, and utilities—often outperform when the economy is shrinking. All the other sectors are somewhere in between.

ISM has four phases. Each phase favors a particular sector. Stock sector memberships are easy to determine. Yahoo! Finance lists stock sector membership under the Profile tab that appears on the left-hand side of each stock summary page. This is market sensitive information. ISM’s business cycle measurement is an important part of how stock market portfolio strategists, including Goldman Sachs, view the Standard & Poor’s 500 Index, and each sector.

The four parts of the U.S. business cycle, as measured by ISM, and according to Goldman Sachs research, are:

1. Early contraction: When ISM drops below 50 and troughs, or hits bottom, healthcare, utilities, consumer staples, and telecommunications services perform best. This cycle’s median length is nine months. (Median means that half of the cycles lasted longer than nine months, and half lasted less.) ...