Whether of not we see a bit of nervousness and a correction in US stocks now that the Fed seems likely to lift rates in December remains to be seen. However, a look at what investors have been buying in the US over recent weeks looks like medium term bull market behavior even if we do get a short term correction.

While every market cycle has its points of difference, the sector rotation model developed by Sam Stovall of S&P 500 is a pretty useful big picture road map for where we might be in the investment cycle

Sector Rotation Model Sam Stovall S&P 500 Sector Rotation Model
Sam Stovall S&P 500

At its close on Friday, the S&P 500 index was up 11.4% on its 29 September low. However, this masks some big changes in the relationship between the sectors. Between 29 September and 6 November, the following sectors outperformed the 11.4% gain in the broader index:

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Energy + 16.7%
  • Materials +15.9%
  • Info Tech + 15.2%
  • Consumer Discretionary + 12.5%
  • Industrial + 12%

 

The following sectors under performed:

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Healthcare + 10.5%
  • Financials + 10.4%
  • Consumer Staples +5.1%
  • Telco +5.1%
  • Utilities - 0.5%

 

This looks like standard bull market behaviour.

The sector rotation model is suggesting we are in the expansion phase of the business cycle and the bull market phase in US stocks. Investors are positioning for growth, buying cyclical stocks. This is outweighing the negative impact that looming rate hikes are having on sectors like utilities.

The energy sector is a bit of an outlier. According to the diagram above it would not be expected to be strongest sector at this stage. The rotation model has it outperforming at the top of the market and near the cycle peak. However, each cycle is a bit different and with the advent of the shale oil industry, energy may now be behaving a bit more like the mining and materials sector.