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Where Are We in the Economic Cycle? [Q2 22 Sector Rotation]

Where Are We in the Economic Cycle? [Q2 22 Sector Rotation]


Let’s review where we are in the economic cycle. This blog post will review the first week of April 22 and discover where the market is moving. We’ll look at sector rotation, which analyses how money moves between industries and use this to forecast the next stage of the economic cycle.

This study looks at the sector rotation from April 1st to April 8th.

From this chart, we can see that communications, technology, and discretionary are all underperforming. Meanwhile, energy is outperforming, utilities are strong, and healthcare is the strongest part of the economy.

What Parts of the Economy to Avoid?

This corresponds with the sector rotation model suggesting we should avoid technology, discretionary, location services, and industrials during this time period. Healthcare is the clear performer, with consumer staples and utilities also strong, with energy still pointing up to a lesser degree.

What to Expect Moving Forward

Theoretically, we are now in the full recovery stage. Industrial production is flat, interest rates are rising rapidly and the yield curve is flattening out. Currently, there're talks from Fed officials who want to raise interest rates, and we can see how the consumer is feeling based on the types of stocks that are outperforming.

“Federal Reserve official James Bullard said he wouldn’t rule out a 75-basis-point interest-rate hike from the US central bank this year, because inflation is “far too high.”" [Source]

Procter & Gamble is outperforming here, showing signs that the consumer is buying staples, canned soups, and housing products, vs. the more fluffy nonsense part of the market. This shows they are in worry mode, instead of Lambo mode. Unfortunately for traders and investors, it means we’re in the crappy part of the market. Old school stocks, Dow industrials, and brick & mortar will do pretty well here. Loading up the DOW stocks, we can see that Coca-Cola, Nike, Procter & Gamble, Walgreens, Boots, Home Depot, Walmart, and similar consumer staples stores are doing very well.

Expect little from industrials or things like oil, as they will be non-events. Pharmaceutical names like United Healthcare are booming in this period, and since this company is the biggest healthcare proxy in the market, this shows we are in a good period for healthcare.

The Market Rollover Sets Up The New Bull

We are at the later stage of this economic cycle, and at some point, we’ll probably see the market rollover. If we’re in the full recovery mode, up next is the bear market and early recession. This also lines up well with the decennial report, which suggests the market will dip into the next few months heading into the middle of summer.

This bear market, however, will simply set the base for the new bull. When the election rolls around, we’ll already be in an early recession period which will set the base for the new bull market. We should expect more cliche negative sentiment over the next few months to keep the market riding downwards. The market has been horrible all year, but once we get past early summer and head into September and October, we could very well see a bottom come in and a rally into elections.

To learn more about sector rotation and market cycles, join the Daily Brief with Brian, with a free 30-day trial to TRI. You could also take the TRi Level 1 Education program and start learning the fundamentals of capital markets and how to follow a trading plan. As always, #pma4tw, and we’ll see you around the site.

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