A tried-and-true investing pattern has lost its shape
Subscribe to enjoy similar stories. One of the biggest simplifications in markets is to buy cyclical sectors when the economy’s booming, and defensives in a slowdown. It’s obvious—until you try to decide what’s cyclical and what’s defensive.
The recent prospect of Federal Reserve rate cuts, inflation-free growth and Chinese stimulus prompted a strong cyclical rally. Or they did on some measures. On others, the picture is confused.
Technology stocks have messed up some of the basic measures, the boom in electricity demand has given boringly-safe utilities a growth tinge and war confuses everything. When it works, utilities, consumer staples such as food retailers, and healthcare are defensive sectors, sure of steady sales even when the economy slows. Consumer-discretionary companies (such as carmakers), banks, industrials, materials and tech were cyclicals, with their performance more closely linked to the economy.
It worked pretty well on Friday when far stronger-than-expected jobs numbers blew up the idea of a slowing economy: Financials and discretionary leapt, while utilities fell and healthcare and staples lagged behind. But the certainties are gone. Giant cash-rich tech stocks have marched to a different beat for years as their growth prospects trampled any barriers economic weakness might present.
The artificial-intelligence boom boosted the “Magnificent Seven" stocks—Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla—to such a size that they came to dominate sectors including consumer discretionary and communication services, spreading the tech confusion. Even industrials aren’t a perfect way to play the economic cycle. On Friday they underperformed the S&P because the strong economy wiped out hopes of
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