The dynamics in this stage of the economy’s rebound look favorable for industries that are levered to the recovery but also offer stable business models and earnings consistency.
While growth stocks have outperformed the broader market throughout this year’s rally, many cyclical stocks have also been generating strong relative returns since market performance has become more nuanced during the past three months. At the sector level, materials and industrials have been among the better performers. We see a similar pattern at the industry level. Within information technology (IT), semiconductors posted robust gains, while the less-cycle software industry generated more muted returns.
While some additional economic stimulus is arguably necessary, the seeming approach of a vaccine deployment in the U.S. suggests that this may take the form of a temporary stopgap. In the meantime, the economy has momentum. Although U.S. job gains have slowed since the summer, recent improvements have been enough to push the unemployment rate below 7%. During the last recession, it took approximately three years for the unemployment rate to fall below this threshold.
Falling unemployment, record-low interest rates and solid household balance sheets are ingredients for increased consumption. A good indicator of consumers’ proclivity to spend is new auto sales. It typically takes many years for auto sales to recuperate from a recession; however, in this recovery, they have already bounced back to a level not far from that of just one year ago. This highlights a broader dynamic in the economy today that compels us to favor high quality cyclicals, i.e., companies that are geared to the economic cycle, but more profitable than their peers.
We believe the combination of considerable monetary stimulus, a strong household sector, improvements in manufacturing and growing optimism for a vaccine distribution in 2021 will support risk assets in the coming months. Sustained improvement in jobs data may be challenged in the near term, especially in industries such as restaurants, leisure and hospitality. However, we believe improving corporate efficiencies and productivity will support profit growth in 2021. In the BlackRock Global Allocation Fund, our exposure is tilted toward high quality cyclicals within specialty chemicals, rails, semiconductors, payment companies and housing.
