We have been highlighting the weakness in momentum and large cap technology stocks. This has led to financial media coverage focusing on Value versus Growth factor performance. We think the more important signal in recent performance trends is cyclical industries/stocks outperforming defensive.
Since the news broke in November 2020 that a COVID vaccine had been developed, the top performing industries have been Energy, Financials, Communication Services, Industrials, and Materials. The worst performing industries have been Utilities, Consumer Staples, Health Care, and Real Estate.
Source: Koyfin.
Performance during this period has favored cyclical industries. Within cyclical industries, performance has favored the most cyclical groups. Investment banking is leading Insurance within Financials, Copper is leading Gold and Glass in Materials, Exploration is outperforming Transports in Energy, and Airlines and Trucking are outperforming Consulting and Logistics within Industrials. Within defensive industries, there is some evidence of cyclicals outperforming as well as Food Distributors and Agricultural Products are outperforming Household Products and Grocery Stores within Consumer Staples. Within Real Estate, Brokerage Firms and Developers are outperforming Industrials and Specialized REITs (data center, self-storage, billboards), which have been more stable recently.
By looking at index composition, the nuance between cyclical versus defensive returns and Growth versus Value becomes more apparent. The Russell 1000 Growth Index, via the iShares ETF IWF, has large positions in Technology and Consumer Discretionary and little exposure to tradition cyclical areas like Energy, Financials, Materials, and Industrials. It also has limited exposure to tradition defensive areas like Utilities, Real Estate, and Consumer Staples.
Source: iShares.
Using the iShares ETW IWD as a proxy for the Russell 1000 Value Index, the portfolio has large weights in traditional cyclical industries like Financials and Industrials, but also has 16% of the portfolio in Utilities, Consumer Staples, and Real Estate combined, compared to 9.5% in Technology and 7.5% in Consumer Discretionary.
Source: iShares.
These weights fluctuate over time, and Ned Davis Research noted that the spread between cyclicals and defensives in the Russell 1000 Value Index is near the lowest level in the data back to 1997.
While cyclicals have been outperforming defensive industries since November 2020, because of the index construction, IWD did not start outperforming IWF until mid-February 2021. This has been mostly driven by the weakness in Technology that we have been discussing in recent posts.
Source: Koyfin.
Looking at the returns of these industry groups and indices help to highlight the importance of what is driving the returns of various exposures and the messages embedded. The current takeaways from this analysis continue to be what we have been highlighting for months; commodity prices are increasing, and economically sensitive factors are going to likely outperform as economic activity increases in 2021.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC