Cyclical stocks fell. Two signs that they are doomed to increase.

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Industrials stocks were held back by concerns about inflation and economic growth.

The time of dreams

Cyclical stocks have been declining recently, but concerns about economic growth do not seem likely to get any worse. Investor interest in these stocks may soon return.

Industrials, hardware and banking were three of the worst performing market sectors over the past month. The

Industrial Sector Select SPDR

exchange traded fund (ticker: XLI),

Materials Select sector SPDR

ETF (XLB) and the


ETFs (KBEs) fell 3.6%, 4.6% and 1.2%, respectively, over the past month. Lower expectations for economic growth in 2021, driven by an increase in Covid-19 infections and the possibility of high inflation eroding consumer demand, are to blame.

Two factors indicate a brighter sky.

The Citi US Economic Surprise Index, which measures how well macroeconomic data exceeds economists’ estimates, recently fell to around 50. This index goes into positive territory when data beats forecasts.

Excluding the initial phase of pandemic lockdowns in 2020, the index has fallen to about 50 times less since mid-2011, only to rebound quickly, according to data from Truist, a commercial bank. The Economic Surprises Index is “in an area that has tended to be followed by positive economic surprises,” wrote Keith Lerner, Co-Chief Investment Officer and Chief Markets Strategist at Truist.

This week’s data is relatively good and stocks tend to benefit. Retail sales in August were better than expected, and on Wednesday, when industrial production reached consensus expectations, the industry fund rose 1%, outperforming the

S&P 500.

Another positive indicator for economically sensitive stocks is that investors have already withdrawn large sums of money from cyclical equity funds. In the past three months, a net total of about $ 8 billion has rolled out of industrial, materials, banking and energy ETFs from the S&P 500, according to data from Truist. The last time net withdrawals hit such a high level, in 2018, money started flowing again soon after.

“We see this as a positive sign for these sectors as markets depend on how data comes in relative to expectations,” Lerner wrote.

Stock prices of industrial, materials and banking ETFs are all below their 2021 highs. They need to gain 5%, 8.9% and 9.3% respectively to return to those levels.

Write to Jacob Sonenshine at [email protected]

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