Sector Rotation

Definition

Sector rotation is an investment strategy that involves shifting portfolio allocations among different industry sectors based on the current phase of the economic cycle. During economic expansion, cyclical sectors like technology, consumer discretionary, and industrials tend to outperform. During economic slowdowns, defensive sectors like utilities, healthcare, and consumer staples typically hold up better. The four phases of the business cycle (early recovery, expansion, slowdown, recession) each favor different sectors. For example, financials tend to outperform early in a recovery when interest rates are rising, while energy and materials do well during late-cycle expansion. Sector rotation requires accurate economic forecasting, which is notoriously difficult.