Managing Exposure in Cyclical and Stable Stocks

Market Outlook
Managing Exposure in Cyclical and Stable Stocks
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Managing Exposure in Cyclical and Stable Stocks

Executive Summary

  • The question for stocks in 2019 isn’t whether earnings will slow, it’s by how much.
  • During such slowdowns, the evidence shows that not all stocks are equal.
  • Tilting towards more defensive stocks during earnings slowdowns can be beneficial to one’s portfolio.

Corporate Earnings: The Landing Pad

The year is off to a great start, in fact, the best start in 28 years.  Stocks have recovered from the selloff that ended 2018, but as we continue through earnings season and get further guidance from CEOs on the profit outlook for 2019, the market is still assessing just how much earnings growth will slow. In this post, we’ll assess the outlook for corporate profits and offer up one way to mitigate the uncertainty for earnings growth.

First, let’s review from where we’re coming.  Fueled by tax cuts, the already strong economy accelerated earnings growth in 2018.  As seen on the following chart, corporate profits have been growing faster than their 10% average since 2017.

Of course, such a fast pace rarely lasts, and the forecast for earnings growth in 2019 is for significantly slower growth in the mid-single digits.  So the question that stocks  are grappling with now is: By how much will corporate profit growth slow? 

Different stocks will react differently to this slowdown in earnings.

The more defensive sectors include essentials such as utilities, health care, and “staples” (groceries, gasoline, etc.), items that consumers are likely to keep paying for during a slowdown.

Cyclical businesses such as restaurants, luxury items, and investment projects (whether corporate or household) can see bigger earnings reductions as consumers look to trim their budgets during an overall slowdown.




Research firm Richard Bernstein Advisors shows how different sectors respond to a slowing earnings environment.  To no surprise, cyclicals are impacted more than defensive names when earnings slow.  (The opposite is also true when earnings rise.)

And the market has already begun to factor this relationship into stock prices.  Stable sectors (i.e., utilities, consumer staples) have been outperforming more cyclical ones (technology, financials, etc.) since late last summer, right before the market peak in September.





The key takeaway here is that investors need to know their portfolio’s exposure, and if one accepts that earnings will slow in 2019, then managing exposure in cyclical and stable stocks will be important.

If you are a client and would like to discuss further, please let us know.  If you are not a client and would like us to assess your portfolio and show you how we might be able to help you, please reach out to Cathy Wegner, Director of New Client Engagement, at (303) 339-4482.

James Callahan, CFA

James Callahan, CFA is Managing Partner at Janiczek® Wealth Management.

Jim brings 20 years investment experience to Janiczek®’s disciplined Evidence Based Investing (EBI) and Strength Based Wealth Management™ (SBWM) platform. He has a Bachelor’s degree in Economics from Santa Clara University, an MBA from the University of Michigan, and is a CFA charterholder.
(303) 339-4483

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