Indexy a trhy
The Business Cycle and How Sectors React to It
Key takeaways
- The business cycle has four phases: expansion, peak, recession, recovery.
- Cyclical sectors (consumer discretionary, industrials) grow with the economy; defensive ones (healthcare, utilities) are more stable.
- Sector rotation sounds tempting, but predicting cycle phases in advance is very difficult.
- A passive investor does not need to actively track rotation — a global ETF covers all sectors automatically.
- Sector ETFs are a tool for more experienced investors with a clear thesis.
The business cycle is a recurring pattern of economic expansion and contraction — and each of its phases favors different stock sectors.
The four phases of the cycle
Economists typically distinguish four phases:
- Expansion — GDP grows, unemployment falls, companies invest. Cyclical sectors do well: consumer discretionary, industrials, technology.
- Peak — the economy grows fastest, but inflation rises and central banks tighten credit. The market begins to price in future slowdown.
- Recession — GDP falls, corporate earnings under pressure. Defensive sectors (healthcare, utilities, consumer staples) hold up better.
- Recovery — the economy stabilizes, new growth begins. Financials and industrials are typically first at the starting line.
Cyclical vs. defensive sectors
Cyclical sectors (automotive, tourism, construction) are highly sensitive to the state of the economy — they fall in recessions and rise sharply in expansions. Defensive sectors (pharmaceuticals, food, electricity) offer stable demand regardless of the economy — people eat and take medicine even in a crisis.
Sector rotation — tempting, but difficult
The idea of rotating between sectors by cycle phase is logical. In practice it is complicated by the fact that precise timing is nearly impossible — and transaction costs and taxes will reduce the strategy's return. What moves the entire market (earnings, rates, expectations) is discussed in the follow-up article.
What this means for the passive investor
A global equity ETF covers all sectors simultaneously. The investor is free of rotation and timing risk. Sector ETFs are a tool for more experienced investors with a specific thesis — for example on healthcare or renewable energy. How to build a starting portfolio without sector bets is explained in the first portfolio guide.
FAQ
What is the business cycle?
A recurring alternation of phases of economic growth and decline. Typically four phases are distinguished: expansion, peak, recession, and recovery. Each phase favors different types of stocks and industries.
Which sectors are defensive?
Healthcare, consumer staples (food, personal care), and utilities (electricity, water). Their demand is relatively stable regardless of the economic cycle — that is why markets do not track them as closely.
Does sector rotation make sense for a typical investor?
Generally not. Precise timing of cycle phases is very difficult, and markets lead the economy by months. A global ETF without sector bets is a more efficient choice for most investors.