Sector Rotation over Business Cycles

Abstract:     
According to conventional market wisdom a sector rotation strategy over different stages of the business cycles outperforms the market. We introduce a simple way to test its value. In our test an investor anticipates business cycle stages perfectly and rotates sectors following popular belief. Even with perfect foresight and ignoring transactions costs sector rotation would have generated at best a 2.3% annual outperformance since 1948. In more realistic settings outperformance quickly dissipates. We do find an alternative rotation strategy that historically would have beaten the market by 7%. Whether by chance or due to fundamentals time will tell.

Keywords: stock market, sector rotation, business cycles, investment strategies

JEL Classifications: E32, G10, G12

Working Paper Series