That's not all you need to know: The earnings of some companies and asset classes move predictably with the broader economy, while other industries and asset classes move along their own trajectory.
"There is the broader economy that affects a lot of things, but then there are individual economies that other businesses are on. Think of small to very large swirling circles. They overlap -- some are swirling left or right or down or up," says Robert Fragasso, Certified Financial Planner professional, chairman and CEO of Fragasso Financial Advisors in Pittsburgh.
How the business cycle works
Like waves in the ocean, the business cycle expands and contracts -- only much more slowly, of course. It begins with an expansionary period, where the economy grows until it peaks, then it begins its descent. Eventually, it bottoms out in a trough, after which activity begins to grow again.
The U.S. economy is currently chugging up the hill of expansion, albeit gradually.
"We are still very definitely in a slow recovery phase. So the opportunities are still in front of us as we recover," Fragasso says.
Some businesses do better than others at various points in the economic cycle. As the economy enters a recession, investors turn to businesses that will soldier on no matter what. For instance: "consumer goods, raw materials, the basic essentials of life. When we're in an economic contraction with minimum growth in the economy, people tend not to spend their money on luxury or pursue longer term investments," says Jeff Sica, president and chief investment officer of Sica Wealth Management in Morristown, N.J.
As the economy shifts into a higher gear, investors focus on businesses that are poised to grow in general.
"That's the time to look to what's next, and that would include things like technology and financials -- anything that is oriented toward the future," Sica says.
What to do now
To take advantage of the evolving economy, investors need to look into the future and understand current trends. That's hard to do in a climate of uncertainty. But economic reports released by government agencies as well as some private businesses can reveal which way the wind is blowing.
Some economic indicators point to the future. For instance, the stock market is often called a leading indicator. Others, such as gross domestic product, are lagging indicators and tell you what happened in the past. Every month, investors piece together clues that hint at what could happen in the future.