Is there a canonical sector rotation playbook tied to the economic cycle?

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AcadiFi · Accepted Answer

The canonical playbook derives from Sam Stovall's S&P sector rotation model, itself grounded in business-cycle theory of when leading, coincident, and lagging indicators peak. Four phases of the cycle pair with four sector regimes. ```mermaid flowchart LR A[Early
Recovery] --> B[Mid
Expansion] B --> C[Late
Expansion] C --> D[Recession] D --> A ``` Early Recovery (rates low, credit thawing, unemployment falling): - Overweight: Consumer Discretionary, Financials, Industrials, Technology - Underweight: Staples, Utilities, Healthcare - Rationale: high operating leverage companies benefit most when growth accelerates off a low base. Mid Expansion (steady growth, Fed hiking gradually, earnings broadening): - Overweight: Technology, Industrials, Communication Services - Underweight: Utilities, REITs (rates rising hurt them) - Rationale: secular growth themes dominate once the cyclical kicker fades. Late Expansion (inflation rising, Fed tightening aggressively, yield curve flattening): - Overweight: Energy, Materials, some Industrials - Underweight: Consumer Discretionary, Financials - Rationale: commodities price-in pipeline scarcity; financials face NIM pressure from curve inversion. Recession (GDP contracting, unemployment rising, Fed cutting): - Overweight: Consumer Staples, Healthcare, Utilities, Telecom - Underweight: Industrials, Materials, Discretionary - Rationale: defensive cash flows and dividend yields attract safety flows. Limits of the playbook: markets lead the real economy by 6-9 months, so the rotation has to be anticipatory. Quantitative signals — yield curve shape, ISM PMI crossing 50, credit spreads — help time the turns. Fidelity and BlackRock publish monthly sector scorecards calibrated to these models.

Is there a canonical sector rotation playbook tied to the economic cycle?

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