Is the Cycle About to Rotate?

Last week saw the major benchmarks ending mostly higher, with the large-cap S&P 500 Index reaching its highest level since February 10. Information technology stocks outperformed, helped by gains in Apple following news of analyst expectations for strong sales of the iPhone 13. A continued rise in many commodity prices boosted the energy and materials sectors, while health care shares underperformed, dragged lower in part by a decline in drug giant Pfizer. The market activity was generally subdued, but there was a notable “buy on the close” trend through much of the week. In fact, Bloomberg reported that the S&P 500 gained one-third of one percent in the last hour of trading for five consecutive days—the longest streak in two decades.

Worries about an increasingly hawkish turn by the Federal Reserve seemed to weigh on equity sentiment early in the week, while also prompting a sell-off in the bond market. On Monday, Fed Chair Jerome Powell repeated that the central bank could deliver rate increases of larger than 25 basis points (.25%) at future meetings, if policymakers deem it necessary to control inflation. That said, Atlanta Fed President Raphael Bostic issued a somewhat contrary statement that “elevated levels of uncertainty” have tempered his confidence that an “extremely aggressive rate path” is appropriate for the Fed.

Developments in Russia’s war against Ukraine also remained on investors’ radars. Heavy fighting continued north of Kyiv, and Ukrainian officials rejected a Russian demand that their forces in Mariupol surrender. Although concerns loom that Russia might deploy lower-yield nuclear weapons, if its advance remained stalled, stocks seemed to gain some footing Thursday afternoon after an advisor to Ukrainian President Volodymyr Zelenskyy voiced “cautious optimism” on ceasefire talks.

Last week’s economic data had a mixed and, arguably, puzzling tone, with some data seeming to improve since the Russian invasion. Durable goods orders fell 2.2% in February, the first decline in five months and much more than the consensus expected fall of around 0.5%. Stocks also appeared to react negatively on Wednesday morning to news that February new home sales declined 2.0%, despite a rise in inventories to their highest levels since 2008. February pending home sales, reported Friday, fell 4.1%, defying expectations for a roughly 1% gain.

Conversely, IHS Markit’s gauge of manufacturing activity rose much more than expected in March and hit its highest level since September 2020, while its services gauge indicated the most activity since July 2021. Meanwhile, weekly jobless claims fell much more than expected and hit levels last seen in September 1969.

Like so much in life, the various sectors of the economy ebb and flow in a cyclical fashion.  Sometimes, those ebbs (or flows) last longer than anyone would have guessed.  In the end, however, “what goes up, must come down,” and it appears we are seeing the beginnings of this in the historic real estate boom.  Attempting to predict the timing of these cycles, of course, is a fool’s errand.  Instead, much like Christ’s reminder to his disciples when asked about His return to earth (“It is not for you to know times or seasons that the Father has fixed by his own authority,” Acts 1:7), we are called to be prepared and remain steadfast stewards of that with which we are entrusted.  Being prepared is where our efforts now turn, as we continue to scour the landscape for opportunities that will position portfolios for eventual sector rotation.

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