Business cycle checklist and a cycle guide

A key problem with sector rotation is determining where you are in the business cycle. A simple approach is to use some macro proxies like the PMI index, industrial production, or leading indicators as a single feature that can show level and trend. A more sophisticated ensemble approach is to employ a set of factors that can form a ranking system. 

JP Morgan has presented a three-stage model for cycle analysis based on early, mid, and late cycle. It does not measure the end cycle which is a recession. The private bank looks at nine factors and then measures which cycle stage the economy is in for each feature. The current results are from May 2022 show a mid-cycle environment given a bimodal difference between early and late factors. A closer look for a current August reading would put the environment more solidly in late cycle. These definitions are not precise, so there may be some disagreement with the cycle locations, but it provides an understandable approach to allocations. 

Mid to late cycle will place greater exposure to large cap over small cap, high quality over low quality, and a switch from value to growth. A late cycle should increase exposure to small cap, low quality, and value stocks.