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Published: Apr 23, 2024 9 min read

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Since the New York Stock Exchange's inception in 1792, the market has experienced a never-ending cycle of booms and busts. And despite the S&P 500's recent sell-off, it appears that the cycle is once again firmly in bullish territory. The most obvious evidence of this comes as investors have begun dumping consumer staples stocks in favor of cyclical stocks.

Consumer staples make for popular investments amid bear markets as they're considered inelastic in demand and offer investors' portfolios a layer of protection from downturns. Such was the case throughout much of 2022 as the S&P 500's consumer staples finished third-best among all 11 sectors on the back of steady gains by companies like Coca-Cola and JM Smucker. And for companies in that sector that posted losses in 2022 — like Colgate-Palmolive, Costco and Target — it paled in comparison to the losses suffered by tech sector giants, including Alphabet (-35.2%), Amazon (-48.3%), Tesla (-64.02%) and Meta (-64.4%).

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However, with the market rebounding in 2023, consumer staples posted the third worst performance among all sectors. Then this past March, with investors injecting almost $100 billion in equity ETFs, the sectors leading those inflows included industrials, materials and energy — corners of the market typically lumped into the category of cyclical investments.

Cyclical stocks include companies that are beholden to all of the economy's booms and busts, doing very well when the economy is hot and poorly when it's not; think of companies like Chipotle, LVMH Moët Hennessy Louis Vuitton or Disney as some examples. Meanwhile, ETFs seeing the most outflows are those in the healthcare and consumer staples sector, both of which are intrinsically defensive in nature.

The news makes for a perfect example of the use investors have for staples and cyclicals. Many people are already invested in both types of stocks if they have a well-diversified portfolio. But whether investors hold more consumer staples or cyclical stocks is often determined by the state of the economy. Knowing how to wield this knowledge can help protect portfolios when it's needed most, and grow them when opportunities arise.