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Mitch sees a larger lesson in the recent outperformance of cyclical stocks


Cyclical Stocks Surge \u2013 A Good Sign for This Bull Market?
The S&P 500 spent a single day in bear market territory on Christmas Eve, but since then the index has rewarded investors who didn\u2019t panic. As I write this column, the S&P 500 has steadily rallied over +18% 1 off the bottom, and one category, in particular, has exhibited strong, noteworthy gains: cyclical stocks.2

Here\u2019s what the data tells us. As you can see from the chart below, Industrials (IYJ), Financials (IYF), and Energy (IYE) have all outperformed the broad S&P 500 since the low on Christmas Eve. The Industrials sector is on pace to outperform the S&P 500 on a quarterly basis for the first time in over 5 years:

Cyclicals have outperformed the S&P 500 during the rally

Closing Price (Index) Data from 12/24/18 to 03/04/1, Source: Yahoo Finance

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Additional Data You Need to Keep an Eye On!

In addition to data surrounding cyclical stocks, there are other economic indicators, data releases, earnings reports, and factors you should watch. To help you do this, we are offering all readers a look into our just-released March 2019 Stock Market Outlook report.

This report will provide you with our forecasts along with additional factors to consider:

- Will 2019 stay bullish?
- Zacks global markets\u2019 outlook
- What sectors show the best opportunity?
- What industries within those sectors most merit your attention?
- Forecast for the S&P
- Small-cap vs. large-cap returns
- And much more.
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

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IT'S FREE. Download the Just-Released March 2019 Stock Market Outlook 3

Why does this matter?

From a macro standpoint, cyclical stocks have historically been a useful gauge of investor confidence in the U.S. economy. Cyclicals tend to outperform early in economic cycles when investors are confident about the U.S. rebounding out of a recession and into a fresh growth cycle. Small-cap stocks also tend to outperform in this phase, for the same reasons.

But as economic cycles wear on and get \u2018old,\u2019 cyclicals often underperform as profitability wanes and growth rates slow. That\u2019s technically where we\u2019re supposed to be in this economic cycle - currently in its 10th year, with a recession \u201cjust around the corner.\u201d But cyclical stocks appear to be telling us a different story.4

Investors may have been reassured by the Federal Reserve\u2019s decision to pause rate increases, strong data in the labor market, and maybe some tailwinds from strong bank earnings and steady lending activity posted in Q4. Even if growth slows down as expected in 2019, cyclicals\u2019 outperformance may be telling us that the chances of a recession this year are low. A good sign.

But in my opinion, there is a more important investment takeaway from this story.

Here it is: While tracking cyclicals may offer investors and market watchers some macro guidance, I would argue that when it comes to portfolio construction, investors would be better served determining their cyclical and non-cyclical exposure by focusing on individual company earnings \u2013 not on the macro environment.

In other words, I believe stock selection matters more than top-down decision making.

The idea that we should own cyclical stocks early in an economic cycle and then switch to a non-cyclical bias late in a cycle doesn\u2019t hold water, in my view. At Zacks Investment Management, we want to buy and own companies that are consistently printing upward earnings estimates and/or have attractive valuations, as opposed to trying to time where we are in the business cycle. If you own quality and you own companies that grow earnings, that to me will add more value over time than shifting between sector and style based on timing the business cycle.

Bottom Line for Investors

If a cyclical stock is growing earnings and revising earnings higher on a consistent basis, my view is that it will do well no matter what \u2018inning\u2019 of the business cycle we\u2019re in. The same applies to non-cyclical stocks or really any other equity category, in my view.

Macroeconomics matter, of course \u2013 knowing economic fundamentals can help an investor determine the earnings outlook for a particular sector or region, which may play directly into setting expectations for corporate bottom lines. But at the end of the day, the bottom line for investors is that it matters more, in my opinion, to construct a portfolio on a company-by-company basis based on bottom-up analysis of earnings and other fundamentals. That\u2019s the approach that we find has worked for us here at Zacks Investment Management since the beginning.

To give you an inside look into these and other fundamentals, check out our exclusive
https://cl.S7.exct.net/?qs=dd7ea328d52770e2f4b16e5e20983664ee65b9a9ec01846ffd0247e55d3b442dd8ef78d63e46f2d0464e430d62392c46ed0ae1f65597951d
March 2019 Stock Market Outlook report.

This Special Report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you'll discover Zacks\u2019 view on:

- Will 2019 stay bullish?
- Zacks global markets\u2019 outlook
- What sectors show the best opportunity?
- What industries within those sectors most merit your attention?
- Forecast for the S&P
- Small-cap vs. large-cap returns
- And much more.
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

https://cl.S7.exct.net/?qs=dd7ea328d52770e2f4b16e5e20983664ee65b9a9ec01846ffd0247e55d3b442dd8ef78d63e46f2d0464e430d62392c46ed0ae1f65597951d
FREE Download \u2013 Zacks' March 2019 Stock Market Outlook 5 >>
ABOUT ZACKS INVESTMENT MANAGEMENTBorn from Research \u2013 Built for Performance
Zacks Investment Management was born out of one of the country\u2019s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we\u2019ve developed to design customized investment portfolios based on each client\u2019s individual needs. The end result is investment management that is research driven, results oriented and client
focused.

Ready to get serious about pursuing your financial goals? Call 1-800-701-9830 today, or schedule a time with a Zacks Wealth Advisor.

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1
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Yahoo Finance, March 6, 2019

2
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The Wall Street Journal, February 24, 2019

3 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

4
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The Wall Street Journal, February 24, 2019

5 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All
information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm\u2019s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

It is not possible to invest directly in an index. Investors pursuing a strategy similar to an index may experience higher or lower returns, which will be reduced by fees and expenses.

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