Gavekal Capital: Game Over For Early Cyclicals?

Thursday, January 23, 2014

Game Over For Early Cyclicals?

We divide the MSCI World index into region-sector baskets in order to understand larger shifts in relative performance.  One consistent theme for the last few years has been the outperformance of North American early cyclicals, which is basically an observation that US consumer discretionary stocks have been outperforming (think retail, autos, homebuilding, etc.).  In addition to the well publicized problems at Sear's and JC Penney, recently Best Buy, Gamestop, Coach, and LuluLemon, to name a few, have pulled up lame. Given that this North American early cyclical basket has outperformed the MSCI World index by 40% over the last three years, and also given the 91% correlation between this basket and 10 year TIPS yields (which have risen over 1.5% in the last year), it could be game over for the relative outperformance of North American early cyclicals in 2014.