"U.K. Stock Market Sectors Follow Cycles. 
Not All Sectors Rise (or Fall) At The Same Time
- Make Profits By Switching Between Sectors"

Introduction

• Stock Market Sectors in the UK comprise of 39 designated groups.  It is a fact that not all of these will 'peak or trough' at the same time.  Different sectors will react differently to others at varying stages of the business 'cycle.'  And companies within each sector will perform differently to others.
  
  
• Economists for years have bleated on about 'The Business Cycle.'   What is this and should we take any notice of it at all?
  
  
• It would be nice to see a clearly defined 'here's the start of the next Bull Market' or 'get out of stocks we're heading for a slump.'
  
  
• If only it were that simple.  If it were, everybody would buy and sell at the same time, which is clearly not the case, nor has it ever been. Nor will it ever be.
  
  
• But, there are visible signs of boom and bust - although it's never quite exactly the same as the last time.

We have only indicators to go by.

"What Are The Main Indicators"

The Conference Board Leading Economic Index (LEI) is a New York based research association that publishes monthly economic data for the world's largest economies.

Here are some of the leading indicators used:

The Conference Board survey companies about output levels over the prior three months, i.e. their order books

They survey companies of their expected output volume for the next three months.

Another indicator is a measurement of consumer confidence.

The 'Yield Spread' is another important indicator.  It is a measure of the difference between interest rates on long (10 year) and short-term rate government bonds.  When the long-term rate is higher than the short-term rate, the higher than long-term 'Yield Spread' is positive and 'normal.'

However, when short-term rates are higher than long-term, a situation arises called an "inverted" yield.  The 'Yield Spread' goes negative and this has been shown to consistently predict a recession.  It happened in 2008, early 2000 and for each of the last seven recessions in the US.

'Yield Spreads' are popular because of their accuracy in predicting recessions.

However, NO indicator is 100% reliable. 

early, Mid, Late, and Recession Phases of a Stock Market Cycle

Markets move in cycles.  And a whole cycle from beginning to end,as shown in the diagram above, cn be seen as having 4 distinct phases.

Depending on which paper or magazine you read, these market phases are idenitified in different ways but they all roughly mean the same thing.

For example, the four stages shown in the above diagram, could have been described as:

• recovery
• growth
• recession
• slump

For this web page,we will stick with the: early, mid, late, recession phase descriptions.

Each of these phases can be characterised by the following:

1.  Early Phase:

• there is a re-bound inactivity e.g. GDP, employment, incomes
• credit starts to grow
• profit grow sharply
• slaes improve
  

2.  Mid Phase:

• growth begins to peak
• growth of credit is strong
• growth in profits peaks
• sales grow
  

3.  Late Phase:

• growth begins to moderate
• credit tightens
• earnings start to comeunder pressure
• sales growth falls
  

4.  Recession Phase:

• there is a fall in activity
• credit disappears
• profits are indecline
• sales fall
  

It should be clear that some sectors of the economy will prosper in each of the phases.  The trick is know where the marketsare in relation to the cycle.

The best way to identify this is to consult a week-end edition of the Financial Times and look for the "Leaders and Laggards" section.

Leaders and Laggards (Financial Times 17/18 October 2020)

The picture portrayed above as taken from the Financial Times week-end edition of 17th/18th October 2020.

It doesn't take a lot of working out to see which sectors are doing best and which the worst. And with reference to the following, an (very) rough estimate of which phase the market is in can be estimated.  

It must be said, that this is a very crude method of determining where the markets are at, and it is suggested that this "Leaders and Laggards" be monitored on a weekly basis, with a view to gaining some consistency.

Once a business cycle has been established, the sectors of the early cycle are as follows:

Early Phase constituents:

• Automobile and Parts
• General Retailers
• Household Goods and Home Construction
• Leisure Goods
• Life Insurance
• Media
• Travel and Insurance

Mid Phase constituents:

• Aerospece and Defense
• Industrial Transportation
• Mining
• Oil and Gas Producers
• OIl Equipment, Services and Distribution
• Real Estate Investment and Services
• Real Estate Investment Trusts
• Software and Computer Services
• Technology Hardware and Equipment

Late Phase constituents:

• Banks
• Chemicals
• Construction and Materials
• Electronic and Electrical Equipment
• Equity Investment Instruments
• Financial Services
• Forestry and Paper
• General Industrials
• Industrial Engineering
• Industrial Metals and Mining
• Support Services

The Recession Phase constituents:

• Beverages
• Electricity
• Fixed Line Relecommunications
• Food and Drug Retailers
• Food Producers
• Gas, Water and Multiutilities
• Health Care Equipment and Services
• Mobile Communications
• Non-Life Insurance
• Personal Goods
• Pharmaceuticals and Biotechnology
• Tobacco

"Sector Rotation"

'Stock Market Sectors' can be switched.

Switching of 'Stock Market Sectors' can be a very good strategy, IF you can get the timing right.

Most institutional investors, and hedge funds, use the indicators, as well as some of their own, to predict when to switch from one sector to another.  They call it 'Tactical Asset Allocation.'

[We're going to start dreaming up a few weird expressions of our own].

Institutions, as well as switching sectors, will also switch stocks within sectors.  

We suggest you do the same but back your own judgement and not that of others. 

If you don't feel comfortable switching either sectors or stocks within sectors, then we suggest you adopt a more 'buy-and-hold' strategy.

After all, an old Stock Market adage is: 'It's time in the markets and not timing the markets' that brings long term success.

"Books Relating to Stock Market Sectors"

Profiting From The Lifecycle of Stocks

Profiting From The Lifecycle of Stocks by Corey Rosenbloom

Super Sectors

Super Sectors by John Nyaradi

Conclusion

In the U.K. there are (at the time of writing this) 39 different sectors.  Ranging from Aerospace and Defence to Travel and Insurance.

Some sectors only have a few companies included - some have many.

However, if you follow the philosophy of investing that we, (and Warren Buffett) prefer, you will only venture into a dozen or so sectors.  You cannot monitor everything.  We are in agreement with Mr. Buffett that investigating 20-30 stocks is more than enough.

Your chosen stocks will be in various sectors, which means that as well as keeping an eye on your chosen company stock, you should also keep a eye on the sector(s) that they belong to.

If you really want to study the idea of switching between individual sectors then we suggest you read the above books carefully and take a look at other web pages on this site.  Notably, Sector Rotation.

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