Is the US economy experiencing a cyclical recovery?
In this final part of the series, we’ll see why Charlie Munger is so positive about Berkshire Hathaway’s (BRK) investments in the airline industry.
The airline industry is a cyclical industry. The cyclical sector has a sizable correlation with the various phases of the business cycle, while the defensive sector has little correlation with the business cycle. In the present scenario, investor sentiment toward the US economy is changing. US economic indicators are showing improving figures.
The labor market is strengthening, and economic growth is improving. Consumer confidence is also growing. Inflation is at 2.0%, which is close to the Fed’s target. It’s also expected that government spending will accelerate in the form of higher fiscal stimulus. All these factors signify that there might be a cyclical recovery in the economy (QQQ) (SPY).
When the business cycle starts to recover, we see expansion in economic activity. Corporate earnings pick up, and fund managers shift their investments toward the cyclical sector. Since the airline industry is a cyclical industry, it has a sizable correlation with the various stages of the business cycle.
Stocks such as American Airlines Group (AAL), Southwest Airlines (LUV), and Delta Air Lines (DAL) are good examples of cyclical stocks. They rose 15.9%, 39.8%, and 4.6%, respectively, over the last year as of February 21, 2017.
You may be also be interested in reading Why Goldman Sachs Believes There’s a Chance of Market Disruption.