The market has experienced many important financial events including recessions and bubbles, but when do we know when those events occur and how do we profit from them? According to fidelity there are market cycles that impact different market sectors differently. The different stages cycles are the following; the recession, were the sector loses value after some sort of financial crisis, the early rebound, where the market strongly rebounds after the recession causing a jump in value, the peaking stage, where the sector rises and reaches its peaks, and finally the moderation cycle, where the sector’s price moderates and consolidation occurs.
After understanding the concept of market cycles, we need to find out where we are now in terms of them. It depends on the sector, but let's just look at the Nasdaq and the s&p 500. These help quantify the market trends so we can find out what stage of the cycle we are in.
Both the s&p 500 and the Nasdaq mirror each other in their graphs so we can assume that they are affected by the same events in the same way. We can also see the previous market cycles that have played out through the years including the financial crisis of 2000’s recession, gains, peak, and moderation followed by the real estate crash in 08-09, leading up to the gains and peaks before the covid crash. If we are considering the covid crash a recession, then we are in the first stage of early rebound and gains with the possibility of peaks being reached. The growth of both the Nasdaq and the S&P 500 are exponentially greater than the gains of the other first stage rebounds despite the crash sizes being comparable in size. We can also entertain the possibility of the next crash being much bigger than the previous ones. According to Fidelity’s chart of sectors that should do very well during the rebound stage, healthcare, energy, and utilities sectors tend to underperform.
We can see that these sectors mirror each other in the sense that they are underperforming in regards to both the S&P500 and the Nasdaq since the Covid crash. This checks out as it is stated in Fidelity’s chart that these sectors(Energy, Healthcare, and Utilities) tend to underperform post crash. Stock sectors that, according to Fidelity’s chart tend to perform very well post rebound, are in fact doing very well. These sectors include financial, real estate, consumer discretionary, materials, industrial, and information technology.
Now that we can validate Fidelity’s graph more, we can be more sure on the coming trends. In the event of this current stage being the peak of the market in this cycle, we can use this information to find stocks that perform the best in the following stages. The sectors that perform well during the peak and moderation stages are consumer staples, communication, healthcare, and energy. According to Fidelity, recessions generally negatively affect sectors so it is best to take a defensive position on the sectors that tend to underperform in a recession situation. The stock sectors that underperform during a recession are real-estate, information technology, industrials, and communication services.
Conclusion:
We are at the peak of a stock market cycle after a recession and the stocks that are going to underperform are x and the stocks that are going to overprefrom during the recession are y. Regardless of how well a sector could overperform, it is generally a good idea to take a defensive position during a recession.
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