In the three years since the start of the COVID-19 pandemic, however, spiking treasury rates, inflation, and a slew of Fed rate hikes have caused investors to rotate out of cyclical stocks. Sensitive and cyclical stocks, more reactive to interest rates and other economic factors, have taken advantage of favorable conditions for most of the last decade. Sector rotation is evidenced in a basic form by comparing the long and short-term performance of sensitive, cyclical, and defensive companies. This practice is known as sector rotation. If the outlook turns sour, investors may sell out of those companies and swap into investments that can better weather economic downturns. When the outlook is positive, economically sensitive companies perform better, prompting investors to buy their shares. As the economy expands and contracts, so do companies’ financial performances across the 11 stock sectors.
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