Cyclical sector rally banks on global economic expansion
NEW YORK: US stock sectors that are particularly dependent on economic growth recently grabbed hold of the market’s rally and are poised to keep the reins should further signs of global expansion emerge. Such sectors, including energy, industrials and financials, beat the S&P 500’s 1.9 percent gain in September. Those sectors had previously lagged behind the benchmark S&P, which has climbed 14 percent this year while feasting on a steady diet of record highs. Instead, shares of technology and healthcare companies, whose profits are more impervious to economic down cycles, have led 2017’s rally.
The question for equity investors is now: Was September just a catch-up period for the lagging, cyclical sectors, or can an economic lift support a sustained run?
“If it’s just a mean-reversion trade, then it’s probably going to last another few weeks and then we’re back to the old winners,” said Walter Todd, chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina. “If it’s something more fundamental, it should be longer lasting than that.”
A test comes next week, as third-quarter corporate earnings season kicks into high gear. Reports from industrial conglomerates General Electric and Honeywell International, railroads CSX Corp and Kansas City Southern and steel company Nucor Corp stand to yield insight into the economy’s health.
September’s stock action, which also included outsized gains for smallcap stocks, had echoes of the immediate aftermath of President Donald Trump’s election in November 2016.
The same areas showed strength on hopes that a Republican-led federal government would push through an agenda, including tax cuts and deregulation, that juices economic growth. Those trades faded as Trump struggled to rack up any significant legislative wins.
Now, investors say, September’s stock rally for those groups again stemmed at least in part from policy hopes, as Trump revved up his taxreform push. “In many ways, we began to replicate the market performance following Trump’s election,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
Improving picture
But an improving economic picture in the United States and globally lends confidence for the cyclical sector rally. The Citi economic surprise index for the United States, a measure of economic data that can come in weaker or stronger than forecast, is around a five-month high, with the barometer trending higher since hitting multi-year lows this summer. —Reuters