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The economic cycle fluctuates over time, moving from peaks of expansion to the troughs of recession, with each phase affecting the performance of different sectors in the S&P 500 in unique ways.
While the average performance levels of affected sectors vary, certain periods may see stronger sectoral performance due to external factors such as technological advancements or major global events (e.g., global pandemics, international conflicts).
The graphic above, using data from SPDR Americas Research, illustrates the top-performing sectors over nearly 70 years of economic cycles.
Economic Cycle: Methodology
This dataset is based on the Leading Economic Index from the Conference Board, which evaluates U.S. economic activity. The index includes 10 economic indicators that typically mark turning points in the business cycle, such as employment, consumer expectations, and financial conditions.
The full dataset, spanning from December 1, 1960, to November 30, 2019, includes:
- 7 recessions
- 7 recoveries
- 12 expansions
- 11 slowdowns
All S&P 500 sector returns are shown except for the communication services sector, as it was established relatively recently in 2018 and consists of stocks previously included in the technology, consumer discretionary, and telecom sectors.
Recession
Broadly speaking, a recession is a temporary economic downturn characterized by two consecutive quarters of GDP decline.
During this period, the consumer staples sector was the best-performing S&P 500 sector and the only one with positive average returns. Defensive sectors such as utilities and healthcare followed. These sectors outperformed the broader market by an average of 10% in six out of seven recessions.
| Rank | S&P 500 Sector | Average Return |
|---|---|---|
| 1 | Consumer Staples | +1% |
| 2 | Utilities | -2% |
| 3 | Healthcare | -3% |
| 4 | Energy | -4% |
| 5 | Consumer Discretionary | -12% |
| 6 | Materials | -12% |
| 7 | Financials | -13% |
| 8 | Industrials | -15% |
| 9 | Technology | -20% |
| 10 | Real Estate | -22% |
The real estate sector performed the worst during recessions due to its high sensitivity to declining household incomes and reduced business activity, which typically leads to lower discretionary spending.
Recovery
The recovery phase marks the period when economic activity begins to increase after a recession.
During this phase, the real estate sector led all others with an average return of 39%, as lower interest rates and looser monetary policies historically made real estate purchases more affordable.
| Rank | S&P 500 Sector | Average Return |
|---|---|---|
| 1 | Real Estate | +39% |
| 2 | Consumer Discretionary | +33% |
| 3 | Materials | +29% |
| 4 | Technology | +28% |
| 5 | Industrials | +27% |
| 6 | Energy | +27% |
| 7 | Financials | +23% |
| 8 | Healthcare | +21% |
| 9 | Consumer Staples | +18% |
| 10 | Utilities | +15% |
As seen in the table above, all sectors delivered double-digit returns during recovery periods as consumer confidence and labor market conditions improved.
Expansion
In this business cycle phase, the economy grows beyond recovery, characterized by increasing economic output, employment, and income.
Interestingly, market returns during expansion phases were the second-highest after recovery periods. As economic activity peaked, technology (21%), financials (19%), and real estate (18%) emerged as the best-performing sectors.
| Rank | S&P 500 Sector | Average Return |
|---|---|---|
| 1 | Technology | +21% |
| 2 | Financials | +19% |
| 3 | Real Estate | +18% |
| 4 | Consumer Discretionary | +17% |
| 5 | Industrials | +16% |
| 6 | Energy | +16% |
| 7 | Materials | +13% |
| 8 | Consumer Staples | +11% |
| 9 | Healthcare | +11% |
| 10 | Utilities | +8% |
The utilities sector historically showed the slowest growth among all sectors, as investors preferred cyclical S&P 500 sectors during economic expansion.
Slowdown
This phase is often considered the peak of the business cycle, where growth begins to decelerate, though the economy does not necessarily contract.
During slowdowns, healthcare was the best-performing sector with an average return of 15%. Investors tend to reduce exposure to cyclical sectors and shift towards defensive investments as they prepare for potential recessions. Similarly, consumer staples performed well during this phase.
| Rank | S&P 500 Sector | Average Return |
|---|---|---|
| 1 | Healthcare | +15% |
| 2 | Consumer Staples | +15% |
| 3 | Financials | +14% |
| 4 | Utilities | +12% |
| 5 | Industrials | +12% |
| 6 | Technology | +10% |
| 7 | Energy | +9% |
| 8 | Materials | +7% |
| 9 | Consumer Discretionary | +6% |
| 10 | Real Estate | +2% |
Just as real estate performed the worst during recessions, it also had the lowest relative returns during slowdowns, when economic activity weakened, and costs typically increased.
A Case for Diversification
This analysis highlights how different sectors perform across various phases of the business cycle. Investors who recognize these patterns can better allocate their portfolios based on economic conditions, but diversification remains crucial to managing risk.
While certain sectors may outperform in specific phases, a well-balanced portfolio helps mitigate volatility and capture returns throughout the entire economic cycle.
