Cyclical stocks battered in brutal rotation as bond proxies shine on growth fears

Investing.com -- Deep cyclical sectors have been battered and bruised over the past six months at the expense of bond proxies such as utilities as worries about slowing economic growth weighed, but the potential for a reflation may pique interest in cyclicals.   

This rotation to bond proxies such as utilities, staples and health from deep cyclicals such as energy, materials, and industrials was likely triggered by fears of a stalling U.S. consumer, stoked by record downward payrolls revisions and downbeat corporate releases from major retailers like Dollar General (NYSE:DG ), Target, and Starbucks (NASDAQ:SBUX ), Louis-Vincent Gave of Gavekal Research said in a note on Wednesday.

As well as worries about the U.S. consumer, China's economic data, particularly in the real estate sector, provided little reason for optimism.

The Communist Party's third plenum failed to deliver significant measures to entice investors, further fueling fears about China's economic performance.

But the winds of economic change are gathering and could revive inflation as well as investor interest in cyclical sectors. 

Several factors including pent-up demand for hiring, pent-up capital spending, low energy prices, corporate spreads near record lows, and easier monetary policies from both the Fed and the People's Bank of China could trigger reflation, Gave said.   "Any one of these developments on its own could be reflationary. All of them together could prove highly potent—at precisely the time investors have more or less given up on cyclical asset classes," Gave added.

Source: Investing.com