Sector rotation patterns

The classic rotation sequence

Lesson one introduced the four phases of the cycle. This lesson zooms in on the order sectors lead in. The classic sequence comes from decades of market data and is sometimes called the Stovall rotation model. It is not a guarantee. Cycles compress, skip steps, and fragment. But it gives you a starting hypothesis for where money is most likely to flow next.

Early cycle. The economy is just exiting a recession. The Fed is cutting rates or holding them low. Credit eases. Three sectors typically lead — Financials (banks lend more as conditions ease), Consumer Discretionary (people start buying cars and big-ticket items again), and Industrials (factories ramp output). High-beta names that got crushed in the recession rip the hardest. This is often the biggest, fastest leg of any bull market.

Mid-cycle. Growth is steady. Inflation is calm. Earnings broaden out. Two sectors usually take the baton — Technology (productivity gains and capex demand drive software and chips) and Materials (raw input demand rises with industrial activity). This phase tends to be longer and lower-volatility than early cycle. Leadership often narrows to a handful of mega-cap names. Pay attention to breadth — narrowing leadership is a late-mid warning sign.

Late cycle and recession. Late cycle brings rising inflation and Fed tightening. Energy, Materials, and Consumer Staples take the lead — energy and materials catch the inflation wave, staples and health care become the rotation destination as defensive flows start. When the cycle finally rolls over into recession, leadership collapses to the truly defensive — Utilities, Consumer Staples, and Health Care. Everything else falls; defensives just fall less.

Recap: Early = Financials, Discretionary, Industrials. Mid = Tech, Materials. Late = Energy, Staples, Health. Recession = Utilities, Staples, Health. Hypothesis lens, not prophecy.