It may seem a little counterintuitive, but as stocks have rallied to new highs since 2009, defensive sectors have led the way. This outperformance has been reflected in the relatively high forward price/earnings multiples among staid sectors like Utilities, Health Care, Telecom, and Consumer Staples.

S&P 500 Sectors: Normalized Forward Price-to-Earnings (Rolling 48 Month Window)

Source: Wolfe Research Portfolio Strategy, as of 5/15/2013

Bars represent the number of standard deviations cheap or expensive compared to the prior 48 months

In contrast, more economy-sensitive cyclical sectors—Technology, Industrials, Materials, and Energy—have been trading at significantly lower multiples of their forward earnings. It appears that in this gradual economic recovery, equity investors retained a sense of wariness. They were willing to bid up stocks’ prices, but focused their attention on sectors traditionally considered to be less aggressive.

Taking a look at some results from recent weeks, it seems a different trend may be emerging. The Utilities sector, for example, continued its solid performance in January through April. But it sold off for most of the month of May, even as a very broad market rally continued.

Dow Jones Utilities Average

Source: Bloomberg, Inc. and Heartland Advisors Inc., 12/31/2012 to 5/31/2013

Past performance does not guarantee future results.

With some strong economic data points coming in—including positive jobs figures and improving consumer sentiment—investors may be gaining a stronger sense of confidence in the economic recovery.

Investors are not exactly throwing caution to the wind, though. By moving into cyclical sectors, they are seeking opportunities in parts of the market that haven’t already been run up to 17 times earnings the way Utilities were.

This turn of events could bode well for value-oriented investors who’ve stayed away from pricier defensive sectors of the market in favor of the Industrials and other cyclicals that have lagged behind.

Ted Baszler, CFA, CPA, is Vice President and Portfolio Manager for the Select Value Fund. He is also Portfolio Manager for three separately managed account strategies: Opportunistic Value Equity, Mid Cap Value, and Core Plus. He has 22 years of industry experience, 19 at Heartland.

Past performance does not guarantee future results.

The value an investment will vary from day to day in response to the activities of individual companies and general market and economic conditions, which may cause loss of principal.

Economic predictions are based on estimates and are subject to change.

Sector classifications are generally determined by referencing the Global Industry Classification Standard Codes (GICS) developed by Standard & Poor’s and Morgan Stanley Capital International.

Dow Jones Utility Average Index is a price-weighted average of 15 utility companies that are listed on the New York Stock Exchange and are involved in the production of electrical energy. The average as it is known today began on January 2, 1929 with a base value of 50. Standard Deviation is a measure of volatility of returns and is computed as the square root of the average squared deviation of the returns from the mean value of the return.

CFA is a trademark owned by the CFA Institute.

The Heartland Funds are distributed by ALPS Distributors, Inc., and Ted Baszler is a Registered Representative of ALPS Distributors, Inc.

Separately managed accounts and related investment advisory services are provided by Heartland Advisors, a federally registered investment adviser. ALPS Distributors, Inc., is not affiliated with Heartland Advisors.

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