So far this year, “defensive” stocks, those that are less sensitive to economic growth, such as utilities and health care stocks, have led the markets higher. However, we may soon be nearing a meaningful and durable shift in the market favoring the more economically sensitive sectors that we call “cyclicals,” which include industrials, consumer discretionary, materials, and technology.
The Citigroup Economic Surprise Index for the 10 major world economies tracks how data are faring compared with expectations. It rises when economic data come in better than economists’ estimates and falls when it is worse. This index has been falling in recent months, due in part to extreme weather conditions in the United States contributing to disappointing economic data. Historically, when economic data are weaker than expected, investors tend to favor defensive stocks, since they are more insulated from the slower pace of economic activity, and when data exceed expectations they favor cyclicals.