Key Points

  • Cyclicals typically lead the market higher when stocks rebound from a bear market and recession—but not this time.

  • The unusual market leadership could mean the market is sending one of two worrisome messages: we haven’t seen the low yet or the recovery is likely to be very weak.

  • If cyclicals begin to lead the market, a rotation to value and international stock market outperformance may catch some investors by surprise.

There may be something amiss with the stock market rebound. Ahead of any meaningful improvement in economic data, global stocks have gained about 30% over the past two months from their low on March 23, as measured by the MSCI World Index. That itself isn’t unusual for a rebound after bear markets and recessions. Following the March 9, 2009 market low point during the last global recession, global stocks gained 39% two months before economic data began to improve. What is unusual? This time, the markets’ rebound has not been led by cyclical stocks.

Different this time

In the past, cyclicals typically lead the market higher when stocks have rebounded from a bear market and recession. Comparing the relative performance of MSCI World Cyclical and Defensive Indexes allows us to review which group of stocks is leading the market rebound. As you can see in the chart below, the market rebound this time is diverging from the last two stock market rebounds from global recessions, when cyclicals outpaced defensive stocks by a wide margin.

Cyclical stocks tend to respond to trends in the outlook for economic growth, such as the rise and fall of demand for manufactured goods produced by companies in the Industrial sector. On the other hand, defensive stocks tend to be less affected by economic cycles. An example of a defensive sector is Utilities: customers tend to pay their electric bills, even during recessions.

By the time the rebounds following the global recessions ending in 2002 and 2009 approached the two month mark (44 trading days), cyclicals outpaced defensives by 10 to 30 percentage points and maintained or widened that lead over the following year. Yet, this recovery shows little difference in performance between the two categories. Uncharacteristically, for much of the past two months, defensives have led the rebound.