by Peter Jones, CFA
Senior Vice President
Last November, Pfizer announced a 95 percent efficacy of their COVID-19 vaccine. Since that time, there has been a notable shift in leadership within the stock market. Although the market had been rising until that point, the best performing stocks were very large technology and communications companies, such as Apple, Microsoft, Google, Amazon and Tesla. The market has continued moving higher, but the composition has changed meaningfully.
In our annual Investment Outlook, we pointed out to clients that sectors of the market perform differently depending on the stage of the economic cycle, as seen in the chart below.
Source: Ferguson Wellman
In the early stages of an economic recovery, “cyclical” sectors such as Financials, Consumer Discretionary, Basic Materials and Industrials tend to lead the way. These sectors are more sensitive to economic growth, so their fortunes tend to be more volatile as they rise and fall with the economy. This is in stark contrast to sectors such as Utilities and Healthcare, which perform well in an economic downturn. After all, you’re likely to pay for healthcare and your electricity bill regardless of the economic situation.
Pfizer’s announcement in November marked the true pivot towards the recovery stage of the economic cycle. As such, we began adding to these cyclical sectors across client portfolios in earnest. We’ve been buying stocks in the Energy, Financial, and Consumer and Industrial sectors at the expense of stocks in the Utility, Staples, Technology and Communication sectors. This has worked out nicely in client portfolios. As can be seen in the table below, these “cyclical” sectors have done much better than their “defensive” peers since the November announcement.
While the rally in “recovery” or “cyclical” sectors will not last forever, we continue to believe there is room to run. Economic growth will likely be very strong this year and the unemployment rate should continue to fall. Although we expect strong performance from the recovery sectors to continue, we do not believe that the ride will continue as smoothly. To put it bluntly: we are due for a correction. Corrections are very normal over the course of an economic expansion and typically are not the harbinger of a new downturn. In fact, the market averages an intra-year decline of at least 10 percent every year as can be seen in the chart below.
Source: FactSet
To summarize, the pivot towards cyclical sectors is well underway, and we expect that to continue…but do not be surprised to find some hiccups along the way.
Week in Review and Our Takeaways:
As expected, cyclical sectors have been outperforming now that the economy is in the recovery stage
While we think the rally in the market has legs, we are due for a correction