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.