Cyclical vs defensive
People keep buying groceries, medicine and electricity in a recession, so those businesses have steadier demand. Cars, travel, and new equipment are easier to postpone, so those businesses see bigger swings.
Common patterns
These are tendencies, not rules, and they have many exceptions:
- Economic expansion: cyclicals, industrials and technology have often led.
- Recession: defensive sectors have often fallen less.
- Rising inflation: energy and materials have sometimes benefited.
- Rising rates: banks may earn more on loans; rate-sensitive sectors like real estate and utilities often struggle.
Why patterns break
Every cycle has unique causes. In 2020, technology thrived during a recession because the shock pushed life online. Markets also move on expectations, so sectors often turn before the economic data does.
What this means for a portfolio
A portfolio heavy in one sector is effectively a bet on one economic story. Spreading across sectors reduces dependence on any single outcome.
Key takeaways
- Cyclical sectors track the economy more closely; defensive ones less so.
- Inflation and rates shift which sectors are under pressure.
- Patterns are tendencies that frequently break.