It's been a long time coming, but hope is running high that the economy may be thinking about a recovery.
While we're anything but out of the woods just yet, the chorus of voices singing the tune of not-too-distant recovery has been getting support from some prominent places.
A light at the end of the tunnel
Federal Reserve chairman Ben Bernanke recently said, "We are hopeful that the very sharp decline we saw beginning last fall through early this year will moderate considerably in the near term and we will see positive growth by the end of the year."
He continued, "The recent data … suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing."
This is the most optimistic he's been in months.
I want to believe
So, does this mean we should wipe away the doom and gloom and break out the champagne? I don't think so.
While the economy's decline is slowing, that's a far cry from even minimal levels of growth -- and there are a few things that will continue to hamper that longed-for growth.
Unemployment is a lagging economic indicator, which means that we don't typically see people out of work until well after business conditions turn sour. But it also means that we won't see unemployment come back down until well after companies begin to see improving conditions. With record-high levels of people out of work, reduced incomes and thus reduced consumer spending will limit any economic growth that may struggle to emerge later this year.
Inflation isn't likely to be a concern in the near term thanks to weak economic and business conditions, but the Fed will, once a recovery gets under way, need to sop up much of the money it has pumped into our economy. Trying to time this monetary policy is very tricky, and any unnecessary delay may spur a nasty bout of inflation.
Finally, should another shock roll through our weakened financial system -- for instance, if it becomes clear that our big-name banks are less solvent than even the most pessimistic scenarios predict -- the result could be a major setback to economic recovery.
Follow the leader
I'm not yet willing to throw my hat in with Bernanke and say that the economy has reached, or soon will reach a bottom, but the moderation of the decline is still heartening, even if it turns out to be nothing more than a dead-cat bounce.
And since the stock market has historically turned up before the economic picture got noticeably brighter, it's important to be in the market now, before the coming recovery (and it will come, sooner or later) is built into stock prices.
So, what should you buy for an economic recovery?
History has shown that, as credit and economic conditions improve after a recession, smaller companies tend to unfreeze earlier than their larger counterparts. To capitalize on this trend and capture the gains from a recovering economy, be sure you've got some high-potential small companies in your portfolio.
Gerald Van Horn, manager of Stratton Small-Cap Value (STSCX), one of my favorite small-cap funds, looks for small but growing companies with healthy balance sheets and promising turnaround stories. Right now, he's stocking up on health-care and consumer-goods names like Amedisys (Nasdaq: AMED ) , managed care organization Healthspring (NYSE: HS ) , biopharmaceutical firm ViroPharma (Nasdaq: VPHM ) , and breakfast cereal manufacturer Ralcorp Holdings (NYSE: RAH ) .
Large-cap growth stocks is another area of the market that I think is overdue for a rebound. This segment has been beaten down unbelievably in the past decade and now sports some seriously bargain-priced opportunities. Manager Will Danoff of the recently re-opened Fidelity Contrafund (FCNTX) is making a bet on companies like Berkshire Hathaway (NYSE: BRK-A ) , Wells Fargo (NYSE: WFC ) , and Visa (NYSE: V ) .
The Foolish bottom line
It's too early to know if Bernanke is correct in calling the bottom of the current economic cycle, but if you want to profit from the recovery, whenever it occurs, you need to get in the game now and start putting that money to work. If you try to time the market, you'll likely miss the best gains.
The best and brightest minds in the business know the importance of being in the market -- and they're buying. To find out what they're adding to their portfolios, head over to the Fool's Champion Funds investment service. With your free 30-day trial, you can get a peek at all of the top-rated mutual funds in the industry and see which investments are most likely to make you money now. Just click here to get started -- there's no obligation to subscribe.
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Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Stratton Small-Cap Value is a Motley Fool Champion Funds recommendation. Berkshire Hathaway is a Stock Advisor and an Inside Value pick. The Motley Fool owns shares of Berkshire Hathaway. Click here to find out more about the Fool's disclosure policy.