Cyclicals: Early or Late

For the first part of the year, early cyclicals (consummer discretionary sector) in North America underperformed late cyclicals (energy, material and industrial sectors), which made perfect sense given the appearance of a strengthening economy and the tapering of FRB asset purchases.  Recently, however, early cyclicals have come back to lead late cyclicals.  Since June 23, early cyclicals have outperformed late cyclicals by 7%.  In the chart below, we compare an equal weighted basket of early cyclical companies in North America against late cyclicals.  

When we compare the relative performance of these two cyclical baskets versus the Fed's tapering, we come away thinking the recent relative performance of early cyclicals is a bit out of step.  In the chart below, we overlay the relative performance of early vs. late cyclicals against the three month increase in Fed assets.  As the Fed was accumulating assets at an accelerating rate, early cyclicals outperformed late cyclicals, and as the Fed has been decelerating its asset purchases, early cyclicals have underperformed.  We think that, despite a small recent detour, late cyclicals will probably outperform early cyclicals over the course of this year.