The More You Know | WSBE 621

Cyclical Investing

Like Sector Investing, Cyclical Investing is a strategy dependent on certain economic cycles. In Cyclical Investing, many investors prefer to buy and sell companies whose fortunes grow and wane, according to specific economic cycles. But investors also have a choice of many cyclical ETFs and Funds, including these:

ETFs:

  • Consumer Discretionary Select Sector SPDR Fund (XLY)
  • Vanguard Consumer Discretionary ETF (VCR)
  • Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD)
  • SPDR S&P Homebuilders ETF (XHB)
  • iShares U.S. Consumer Services ETF (IYC)
  • SPDR S&P Retail ETF (XRT)

Funds:

  • Fidelity Select Consumer Discretionary Portfolio (FSCPX)
  • Fidelity Select Construction & Housing Portfolio (FSHOX)
  • Fidelity Select Retailing Portfolio (FSRPX)
  • Fidelity Select Automotive Portfolio (FSAVX)
  • Fidelity Select Leisure Portfolio (FDLSX)
  • Fidelity Advisor Consumer Discretionary Fund Class A (FCNAX)

For instance, let’s look at sectors that do well during different economic cycles. In an Early Bull market cycle and Economic Trough, investors generally favor Financials, for example. Consequently, during those cycles, you may want to buy investment and asset managers. With the idea that the economy will be improving, more folks will flock to the stock markets, sending the shares of brokerage houses higher, which is what is currently happening. Financial stocks have gained more than 27% so far this year.

Yet, between an Economic Recovery and Recession, and a Middle Bear stock market, investors will favor safer, more staid stocks, such as Utilities.

The following chart shows that we are still in an expansionary economic phase, and we continue to be in a bull stock market. Once we move into the next phase, we should see investors becoming more conservative, favoring larger, established companies, especially those that pay dividends.

Cycle Phases of the Economy

Source: Fidelity.com

The key is to be aware of the macro environment for the stock market as well as the economy. The old adage of “buy and hold” no longer works in our global economy, where news from across the world can rock our markets.


The next Wall Street’s Best ETFs issue will be published on July 6, 2021.

Cabot Wealth Network
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Chief Investment Strategist: Timothy Lutts
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