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Economic and Stock Market Cycle

In theory, it states that different sectors tend to perform differently within the economic cycle. The theory is based on the premise the stock market cycle leads the economic cycle due to the discounting mechanism or the anticipatory effects of stocks on the economy.

US Economic and US stock market cycle

Early Middle Late Early Late

Stage: Expansion Expansion Expansion Contraction Contraction

Time: 12-18 mo 12-18 mo 12-18 mo 6-9 mo 6-9 mo

Rates: Bottom Rising modestly Rising rapidly Peaking Falling

Curve: Normal/Steep Steepening Flattening Flat/Inverted Inverted

Inflation: Declining Bottoming Rising Moderating Flat-to-down

Industrial: Rising Rising sharply Flat Peak/falling Falling/bottom

Sentiment: Rising Rising sharply Rising/Peaking Declining Bottoming

US Sector Rotation

Early Expansion: Technology and Transportation

Middle Expansion: Basic Materials, Capital Goods, and Services

Late Expansion: Consumer Staples, Healthcare, and Energy

Early Contraction: Utilities and Telecom

Late Contraction: Consumer Cyclical, Financial, and Real Estate


Although there is no sure thing in the real world of investing, however, based on the current US interest rates, US treasury yield curve, inflation trend, industrial production, and consumer sentiment the US economy is transitioning from the late-contraction phase to the early-expansion stage of the US business cycle.

It would appear the S&P 500 sector rotation from its 3/23/20 market bottom favors the late-contraction and the early-expansion S&P sectors. For instance, S&P Technology (XLK) has gained 102.67%, Consumer Discretionary appreciated 94.96%, and Financials returned 84.69%. The above is in sharp contrast to defensive sectors such as Consumer Staples appreciating 37.84% and Utilities advancing 41.34% during the same period.

The Relative Rotation Graph (RRG) study also supports the basis the US economy and stock market are entering the late-contraction to early-expansion phase as Financials, Technology, Consumer Discretionary are residing in the Leading Quadrant or close to reversing from the Weakening Quadrant to the Leading Quadrant. Two classic defensive sectors such as Utilities and Consumer Staples continue to reside within the Lagging Quadrant, further reaffirming an expanding economy and hence a bullish stock market cycle.

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

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