Monday, January 17, 2011

Sector Rotation And The Economic Cycle

Since the S&P 500 reached a low in March 2009, the market has enjoyed a strong recovery to the upside. Along with the stronger equity market, the economy has gained a firmer footing as well. Some of the economic support is a result of the Fed's and government's intervention. Some would say that in spite of this intervention the economy is experiencing growth, albeit slow growth. An important fact for investors is the market sectors perform differently depending on where the economy is as it relates to the economic cycle.

From The Blog of HORAN Capital Advisors

The chart below shows the performance of the various market sectors at various points along the economic cycle. A report prepared by Fidelity last year, A Tactical Handbook of Sector Rotations, details the four phases of the economy. The first two phases:
  • Early-cycle phase: Begins prior to the end of a recession as investors begin to anticipate an economic recovery, and extends through the initial economic acceleration. The stock market historically has registered exceptional gains, on average 32% during this period. [For the purposes of this article, this phase begins three months prior to the end of a recession and extends through the first nine months of recovery.]
  • Mid-cycle phase: Begins prior to the Fed’s initial rate increase, as the recovery broadens into expansion and the Fed moves to dampen inflation pressure. The market typically performs well during this phase (average return of 11%). [Begins three months prior to the initial rate hike, and extends nine months beyond.]

From The Blog of HORAN Capital Advisors

The early cycle phase tends to last through the first nine months of the recovery. The National Bureau of Economic Research (NBER) sets the beginning and ending dates of recessions. NBER has marked the end of the current recession as occurring June of 2009. If the economy follows its average cycle, the early cycle phase would have ended on March 2010. At HORAN we do not believe this is a typical recovery for a number of reasons, many of which have been debated in the media. Much debate occurred during the summer last year about a double dip recession. Consequently, the phases of this cycle seem to be lengthened. Having noted this, we believe the economy is in the later stages of the early-cycle. The mid-cycle phase begins prior to the Fed's initial rate increase.

From The Blog of HORAN Capital Advisors

Among many factors, one that investors need to look at are actions and statements by the Fed to gain clues that a rate increase may be forthcoming.


A Tactical Handbook of Sector Rotations
Market Analysis, Research & Education
A unit of Fidelity Management & Research Company
August 23, 2010

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