As the Federal Reserve gave capital markets reason to brace themselves for interest rate cuts this year, investors can vacillate on whether they should pour funds into cyclical or defensive sectors.
If capital allocation in either sector during the month of June is an indication of which way to go, then cyclical would be the best option.
Led by a strong performance by the materials sector, cyclical sectors took the lead over defensive sectors in June following a volatility-laden May.
“The dynamic between Cyclical Sectors and Defensive Sectors continues to be interesting,” a Direxion Investments Relative Weight Outlook post noted. “While previous months saw Cyclical Sectors leading on the back of the Information Technology sector, the 0.88% relative outperformance throughout June in cyclical names was driven by leadership in the Materials sector. Technology names outperformed the broader market in June, but the leadership via Materials is a good sign of market breadth and recovery in names that have been year-to-date laggards.”
“The 0.88% spread between Cyclical and Defensive stocks is the second smallest monthly spread on record for the year so far, but the outperformance is notable given the 3.10% underperformance we saw throughout the month of May,” the post added. “Bond proxy sectors such as Utilities and Real Estate were, by far, the largest laggards in June, and were large contributors to the relative performance spread; another sign of a more “risk-on” tune.”
Fed Chairman Jerome Powell reiterated his ongoing message of patience as the wait-and-see approach by the central bank continues to persist. What the stock market does after a rate cut is what the markets are left wondering.
How does this play into the cyclical versus defensive narrative?
Getting Defensive or Cyclical as Rate Cuts Loom
With the markets digesting the lack of a rate cut, the major indexes moving to the downside could signal that more defensive maneuvers might be necessary moving forward. As such, investors can look to relative weight exchange-traded funds (ETFs) to play either side of the move.
If investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
For more relative market trends, visit our Relative Value Channel.