Cyclical Stocks Hit Hard in Harsh Rotation as Bond Proxies Excel Amid Growth Concerns

Investors have seen deep cyclical sectors struggle over the past six months, often sacrificing these areas for more stable options like utilities, as concerns about slowing economic growth have weighed heavily on the market. However, the prospect of reflation may start to draw attention back to cyclical stocks.

The shift towards safer investments, including utilities, staples, and healthcare, stems from fears surrounding a stalled U.S. consumer, amplified by significant downward revisions in payroll numbers and disappointing corporate earnings from major retailers. This sentiment has been reflected in the performances of companies like Dollar General, Target, and Starbucks, as noted by Louis-Vincent Gave of Gavekal Research.

In addition to U.S. consumer concerns, China’s economic indicators, particularly in the real estate sector, have also contributed to overall pessimism. The recent third plenum by the Communist Party did not announce substantial measures to attract investors, further igniting fears about China’s economic outlook.

Nevertheless, there are signs that economic conditions might be shifting, potentially reviving inflation and investor interest in cyclical sectors. Factors such as pent-up labor demand, increased capital expenditures, low energy prices, corporate debt spreads reaching historical lows, and more accommodating monetary policies from both the Federal Reserve and the People’s Bank of China could collectively lead to reflation.

Gave emphasized that even if each of these factors spurs reflation on its own, their combined effect could be particularly powerful—especially at a time when investor enthusiasm towards cyclical asset classes has waned significantly.