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Intermediate · Lesson 3 of 5Economic cycles and sector rotation
Economies move through expansion, peak, contraction (recession) and recovery. Sectors tend to lead at different stages: financials and consumer discretionary often lead early recoveries; industrials and materials in mid-cycle; energy and staples late; utilities, healthcare and staples are defensive in recessions.
Leading indicators include the yield curve, building approvals, new orders surveys (PMIs) and credit spreads. Unemployment is a lagging indicator.
The pattern is a tendency, not a rule. Every cycle differs, and shares usually bottom before the economy does, often while the news is still terrible.
Key takeaways
- Different sectors tend to lead at different cycle stages.
- PMIs, approvals and the yield curve lead; unemployment lags.
- Markets usually bottom before the economy.
Check your understanding
1. Which sectors are usually most defensive in recessions?
- Technology and discretionary
- Utilities, healthcare and staples
- Miners and energy
- Small caps
Show the answer
Utilities, healthcare and staples. Demand for essentials is steady.
2. Share markets typically bottom...
- After the economy recovers
- Before the economy bottoms, while news is bad
- Only at year end
- When unemployment falls
Show the answer
Before the economy bottoms, while news is bad. Markets look ahead.
Go deeper
- Wikipedia: Business cycle
- YouTube videos: sector rotation business cycle investing
- Investopedia: sector rotation
- Wikipedia: Purchasing managers' index
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