Lesson 5
Sector Rotation
Align your sector allocation with cycle phase. Don't hold late-cycle winners in early cycle. Don't hold early-cycle winners in recession. The cycle is your rotation guide.
📊 Indicators mentioned in this lesson (click for details):
Different sectors outperform at different cycle phases. Understanding sector rotation is one of the most practical applications of business cycle analysis.
Early Cycle Winners:
- Financials: Banks benefit from steepening yield curve (T10Y2Y)
- Consumer Discretionary: Pent-up demand releases
- Industrials: CapEx recovers
- Small Caps: High-beta, benefit most from recovery
Mid Cycle Winners:
- Technology: Growth at reasonable rates
- Industrials: Continued CapEx
- Materials: Commodity demand
Late Cycle Winners:
- Energy: Inflation beneficiary
- Healthcare: Defensive growth
- Consumer Staples: Non-cyclical demand
Recession Winners:
- Utilities: Stable dividends, essential services
- Consumer Staples: People still buy necessities
- Healthcare: Non-discretionary
- Treasuries: Flight to safety
- Cash: Optionality
Factor Rotation:
- Early: Momentum, High Beta, Small Cap
- Mid: Quality, Growth
- Late: Value, Low Volatility
- Recession: Min Vol, Quality, Treasuries
Check your understanding
Lesson Quiz
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Quiz Check
You're rotating from recession positioning (utilities, staples, cash). What should you buy as early cycle begins?