Sector rotation across the business cycle - relative and absolute performance

The asset rotation game can be played with sectors, risk premia, and asset classes such as fixed income. SSGA provides some insights on how to make these asset allocation decisions using a simple framework based on the Conference Board leading economic indicators. The LEI can be a rough signal, but an HP filter can be employed to break down the LEI into four cycle components. 

From these cycle components, performance can be measured for different sector returns on as relative and absolute basis. Focusing on recovery and contractionary phases shows significant differences in performance so that even if an investor does not get the regime timing right, there is still room for excess returns through changing allocations.  

The current environment is playing out as a contractionary regime. Better to hold Treasuries, low volatility and healthcare or consumer stables. The last month has switched the performance gains to other sectors, but a regime bias to contractionary investment may prove to be both return driven protective to investors.