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Sector Rotation across the Business Cycle

53 Pages Posted: 3 Mar 2008 Last revised: 27 Sep 2011

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; New Zealand Institute of Advanced Study

Jeffrey Scott Stangl

Massey University - School of Economics and Finance

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: December 2009

Abstract

Conventional market wisdom posits that sector rotation over various stages of the business cycle generates market outperformance. We introduce a simple way to test the value of sector rotation. In our test, an investor anticipates business cycle stages perfectly and rotates sectors in accordance with conventional practice. Even with perfect foresight and ignoring transactions costs, sector rotation generates, at best, a 2.3 percent annual outperformance from 1948 to 2007. In a more realistic setting, outperformance quickly dissipates. We do find an alternative rotation strategy that historically beats the market by 7 percent. Whether by chance or due to fundamentals time will tell.

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

JEL Classification: E32, G10, G12

Suggested Citation

Jacobsen, Ben and Stangl, Jeffrey Scott and Visaltanachoti, Nuttawat, Sector Rotation across the Business Cycle (December 2009). Available at SSRN: https://ssrn.com/abstract=1467457 or http://dx.doi.org/10.2139/ssrn.1467457

Ben Jacobsen

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

New Zealand Institute of Advanced Study ( email )

Auckland
New Zealand

Jeffrey Scott Stangl (Contact Author)

Massey University - School of Economics and Finance ( email )

Auckland
New Zealand
+64 414 0800 (9487) (Phone)

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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