Can the Cyclical Sector Stage a Comeback as Economy Reopens?

While the pandemic sell-off was in full swing, cyclical sectors took a hit as investors sought safer havens like bonds and gold. Fast forward to today, and the prospect of an economic recovery could be setting the stage for a cyclical sector comeback.

Per a Wall Street Journal report, a number of market experts “agree any meaningful recovery in the stock market will be driven by cyclical shares. But when so much remains unknown about the outlook for the economy, many are questioning the viability of the recent rally. A second wave of coronavirus infections, long-lasting economic fallout from stay-at-home orders and escalating tensions with China could send the economically sensitive shares tumbling, they warn.”

“It makes sense that people are buying cyclicals on the [vaccine]optimism,” said JJ Kinahan, chief market strategist at TD Ameritrade. “But the part that makes me nervous is midmonth in June when most states [are open]…I don’t know if the reality will be able to keep up with the great expectations that we’re seeing right now.”

One of the cyclical sectors to consider is real estate and one interesting play is the Xtrackers International Real Estate ETF (HAUZ), which seeks investment results that correspond generally to the performance of the iSTOXX Developed and Emerging Markets ex USA PK VN Real Estate Index. iSTOXX Developed and Emerging Markets ex USA PK VN Real Estate Index is a free-float capitalization-weighted index that provides exposure to publicly traded real estate securities in countries outside the United States, Pakistan, and Vietnam.

The MSCI All Country World Index (ACWI) ex-USA is a market-capitalization-weighted index designed to provide a broad measure of stock performance throughout the world by tracking the performance of 22 developed and 24 emerging markets. Relative ETF plays on cyclical sectors are another option ETF investors can consider.

For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well but from their outperformance compared to defensive sectors. RWCD seeks investment results that track the MSCI USA Cyclical Sectors – USA Defensive Sectors 150/50 Return Spread Index, which measures the performance of a portfolio that has 150% long exposure to the MSCI USA Cyclical Sectors Index and 50% short exposure to the MSCI USA Defensive Sectors Index.

For more relative market trends, visit our  Relative Value Channel.