ETFs providing exposure to cyclical sectors of the equity market are prospering as lockdown restrictions are eased and economies stir to life.
The latest phase of the market rally has been led by cyclical sectors including industrial, energy, financial, and consumer discretionary stocks.
Industrial, financial, energy, and consumer discretionary stocks have outperformed over the past two weeks, marking a change from the market’s initial rally when technology stocks, as well as defensive sectors such as utilities, consumer staples, and healthcare led the way.
While the SPDR S&P 500 ETF (SPY US) gained 6.1% between 15 May and 27 May, lifted on optimism for a Covid-19 vaccine and buoyed by ongoing pledges of fiscal and monetary support, it was economically sensitive sectors that powered the US stock market rally.
Investors have been betting on a swift return to pre-pandemic levels of economic activity in the States – the Industrial Select Sector SPDR Fund (XLI US) jumped 15.6%, the Financial Select Sector SPDR Fund (XLF US) rose 14.4%, the Energy Select Sector SPDR Fund (XLE US) advanced 11.2%, and the Consumer Discretionary Select Sector SPDR Fund (XLY US) climbed 8.5%.
While unemployment remains high, the US economy has started to show other signs of crawling back including increases in air travel bookings, restaurant and hotel reservations, gasoline demand, and mortgage applications.
As manufacturing activity begins to pick-up, the price of oil has been staging a tremendous rally, albeit from a very low base, with front-month West Texas Intermediate oil futures contracts surging over 65% in May and currently trading around $32 per barrel.
The recovery has led investors to search out stocks that were potentially oversold in the early days of the pandemic. The airline industry, which suffered the full brunt of the coronavirus equity market rout, has experienced one of the most favourable turnarounds. The US Global Jets ETF (JETS US), after tail-spinning down 62.1% since the start of the year, regained some altitude, adding 33.5% since mid-May. The rebound will be cheered by investors that have backed the fund in recent months – JETS has seen a surge in investor demand since the beginning of March with in excess of $800 million in net new assets.
Homebuilders have also notched up superior returns with the iShares US Home Construction ETF (ITB US) gaining 24.2% as the US housing market showed signs of stabilizing. According to data from the Department of Housing and Urban Development and US Census Bureau, new single-family house sales in April came in at 0.6% higher than estimated.
Meanwhile, while investors were focusing on picking up bargains in undervalued corners of the market, the rally in technology stocks lost some of its momentum. The Technology Select Sector SPDR Fund (XLK US) gained just 3.8% since the beginning of last week.
The other side of the Atlantic, cyclical sectors also played a key role in boosting the European equity market.
While the broad market iShares STOXX Europe 600 UCITS ETF (0MLD LN) gained 6.5% in euro terms since 15 May, the iShares STOXX Europe 600 Industrial Goods & Services UCITS ETF (SXNPEX GY) jumped 11.7%, the iShares STOXX Europe 600 Construction & Materials UCITS ETF (SXOPEX GY) rose 11.2%, the iShares STOXX Europe 600 Banks UCITS ETF (0MNK LN) climbed 9.0%, and the iShares STOXX Europe 600 Oil & Gas UCITS ETF (0MOH LN) advanced 8.6%.
Consumer stocks, however, have emerged as the biggest winners with travel companies and automobile manufacturers in particular commencing a strong fightback. The iShares STOXX Europe 600 Travel & Leisure UCITS ETF (SXTPEX GY) and iShares STOXX Europe 600 Automobiles & Parts UCITS ETF (SXAPEX GY) have both pared losses with gains of 17.2% and 17.4% respectively.
European technology stocks have maintained more favour than their US counterparts with the iShares STOXX Europe 600 Technology UCITS ETF (SX8PEX GY) adding 7.8%.
Whether equity markets can maintain their recent rally, however, likely depends on how well the economy bounces back to life over the next few months. Persistent high unemployment and dented consumer confidence could both temper the momentum, while a surge in new infections and the re-imposition of lockdown controls would be devastating.