January 05, 2024: Transition

The bull market is now entering its 15th year of advancement. Over the last few months, we have looked for evidence that would show a continuation of the upward trend is probable or that a top is likely forming.
We have reviewed the fundamentals (EPS), economics, technicals, and business cycle basics to help determine the current position of the bull market.

In this report, we are focusing on sector performance at the different stages of the business cycle to help determine which phase the market is in.

The latter portion of a bull market is labeled as the Expansion phase of the business cycle. Economic developments at this stage range from GDP growth reaching its peak to increasing capex for meeting improving demand to interest rates starting to slowly rise (Chart 1).

Those industry groups that normally outperform the benchmark S&P 500 are Financials, Technology, and Communication Services.

The performance of these key sectors relative to the S&P 500 helps to identify this cycle. Recently, these groups have started to show some signs of reduced relative strength. In Chart 2, only one of the three sectors, the Financials (XLF), is outperforming. The Technology sector (XLK), which was a star performer for the last few years, has now broken its upward trend. The Communication Services sector (VOX) also appears to be losing some performance against the benchmark index. More time is needed to confirm.

The next phase of the business cycle is the Slowdown stage. This portion of the economy is characterized by elements such as capacity utilization peaks, positive, but decelerating growth, and more restrictive monetary policy.

The industry groups that typically outperform at this stage are Consumer Staples, Health Care, and Industrials (Chart 3).

In the last month or two, there has been a transition. Two out of three key sectors have broken out. The Health Care ETF (XLV) and the Industrial ETF (XLI) have reversed a downward trend. Only the Consumer Staples ETF (XLP) remains in the same trend as in 2023.

Bottom line: The sudden price weakness in the sectors associated with the Expansion cycle and the growing performance in the industry groups that is part of the Slowdown phase is noteworthy. However, in 2022, sectors in the Expansion phase were underperforming, and all sectors in the Slowdown phase were outperforming the S&P 500.

Is the current movement just another wave? Perhaps, but as the bull market ages, these transitions from expansion to slowdown are increasingly more important to the investor.