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Your Economic Stage Shapes Your Investment Direction

The economic cycle can be separated into four phases: reflation, recovery, overheat, and stagflation, based on the level of two economic indicators: economic growth rate and inflation rate.

During reflation and stagflation, investors may favor defensive investing strategies, which are designed to protect investors from significant losses caused by a major market downturn.

Refer to the image below to identify the economic cycle phase:

Understanding Blue Chips

Blue-chip stocks are large companies that can offer a reliable investment opportunity. They are recognized, well-established, financially sound leader company in their industries.

They can be a solid tactic for a defensive investing strategy in periods of stagflation or reflation. In other words, it may not offer as high a return as other riskier investments, but, just as facing ups and downs in life can help you weather future storms, blue-chip stocks can remain steady when the economy takes a hit.

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Three Indicators for Choosing the Best Blue-chip Stocks

1. A large market capitalization

Market cap is used to measure the size and value of the company. The first step to picking blue chips is looking for large-cap stocks that are leaders in their industries. Companies with a market cap above $10 billion are considered potential blue chips.

2. A lower P/E ratio

Value investors evaluate a company's potential based on its price-to-earnings (P/E) ratio. If a company in a particular industry has a P/E ratio of 20 with its major competitors at 25, the company stock may be undervalued and might have high growth prospects.

Want to check them out on Webull? With the Industrial Heatmap, you can see the stock ranking of an industry and sort it according to indicators like market cap and P/E ratio. Refer to the picture below to find this function.

Don't forget to add the stocks you like to your watchlist by clicking the heart icon on the individual stock page.

3. High ROE and ROA

ROE and ROA are tools for measuring a company's performance against its peers. Blue-chip companies often display high ROE and ROA.

Choose a stock and go to the details page. Click Company>Financials>The icon next to Key Indicators to check peer comparison according to several indicators.

Disclaimer: All companies and symbols provided are for educational and informational purposes only and do not constitute an investment recommendation or advice.

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The Bottom Line

Some investors believe that bear markets offer the best time and opportunity to buy good stocks at reasonable prices. Over time, blue chips have been proven regardless of the market environment and have a long history of reliable returns. But all investments carry some degree of risk, including the possible loss of principal. You can get a clearer picture of your investment direction by identifying which economic stage you are in and using indicators.