What Is Sector Rotation?
The movement of investment capital from one industry sector to another as the economic cycle changes.
The Full Definition
Sector rotation is the theory — and practice — of shifting investments between different stock market sectors based on where we are in the economic cycle. Different sectors tend to outperform at different points: early in a recovery, consumer discretionary and technology often lead; later, industrials and materials; and defensives like utilities and healthcare tend to hold up best during slowdowns. Understanding sector rotation helps investors position their portfolios ahead of macro shifts.
Real-World Example
Ahead of an expected recession, an investor might reduce exposure to consumer discretionary and tech stocks and increase allocation to consumer staples, healthcare, and utilities — sectors where demand remains relatively stable regardless of economic conditions.