Investors have been shunning high quality and defensive companies (and sectors) in favor of more speculative investments since the stock market lows in March, 2009.
This approach has paid off in spades as the Fed (through monetary policy) and Congress (through tax cuts) continually bailed out poor investment decisions whenever stocks swooned.
However, an interesting sea change has developed within the stock market since the end of the first quarter. It appears that money is now (finally) rotating into the more defensive and less cyclical industry sectors. Whether the rotation is attributable to the dramatic slowdown in 1Q GDP growth or to fears about the end of QE2, we believe it is long overdue.
As the graph below shows, the best performing industry sectors over the five quarters ending March 31, 2011 were also the most cyclical sectors: Energy, Industrials, Consumer Discretionary, and Materials. Since the beginning of the second quarter, though, the highly cyclical sectors have been among the worst performing while the more defensive sectors - Health Care, Consumer Staples, and Utilities - have been leading the gains.