This Recovery Looks Different

This Recovery Looks Different

over 3 years ago2 mins

The MSCI World Index of global stocks shows prices rising 30% over the past two months. The fact that hard economic data doesn’t yet justify such optimism isn’t particularly unusual – but according to big broker Charles Schwab, the relative performance of “defensive” and “cyclical” stocks may create more cause for concern… 😯

What does this mean?

The last time stocks were rebounding from a bear market, in 2009, the World Index – which tracks performance across 23 developed economies – had already risen 39% two months before economic data began to improve. But both then and in the aftermath of the previous 2001 recession, the market recovery was initially led by growth in cyclical stocks. Those most sensitive to improvements in the economic growth outlook outperformed by between 10-30%.

That isn’t the case this time around, however. In fact, so-called defensive stocks in stolid sectors such as utilities and healthcare actually performed better during much of the recent rebound.

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According to Schwab, this means one of two things. Either stocks are at risk of falling again to fresh lows like they did after the initial 2002 recovery – perhaps prompted by an uptick in infection, unemployment or bankruptcy rates – or else investors think this economic recovery is going to be inordinately long and slow 😞

Why should I care?

Keeping an eye on the relative performance of cyclical and defensive stocks around the world – and there are signs, shown above, that cyclicals could now be edging ahead – may afford investors opportunities elsewhere.

The start of a new business cycle and its accompanying reset of growth expectations typically heralds a reversal of fortunes for stocks in different geographies (i.e. the US vs the rest of the world) and different styles (i.e. growth vs value – for more on which, check out our Pack on Investment Styles).

As value and international stocks tend to be inherently more cyclical, these approaches would stand to simultaneously outperform. All that’s needed may be hard proof of economic improvement… 😅

The EAFE Index excludes the US & Canada; yield curve inversion typically signals the end of a cycle
The EAFE Index excludes the US & Canada; yield curve inversion typically signals the end of a cycle
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