There are different investment approaches to identify sector winners and losers, such as price momentum strategies, top-down approach based on specific macroeconomic indicators or bottom-up approaches to identify sectors with improving fundamentals. One widely used approach is business cycle analysis. Since economic cycles usually exhibit characteristics that impact sectors or industries differently, investors may identify sectors that are favored by the current economic phase.
A standalone business cycle based sector rotation is difficult to implement, as differences exist on economic conditions of each cycle over time and transformative technology continues to alter business model and economic impact. However, understanding cycle dependency on sectors is important to sector portfolio construction, particularly for a top-down approach.
To make a quantitative and systematic assessment of how different sectors performed through various business cycles, we used the Conference Board Leading Economic Indicator Index (LEI) to segregate business cycles and evaluated sector performance over multiple business cycles and evaluated sector performance over multiple business cycles between 1960 and 2018. This provided a good sample size to evaluate sector performance persistency for different cycles.