Hi all
In CFAI Portfolio Management topic test, Quantum case, answer of Q6 says “Cyclical stocks tend to outperform non-cyclical stocks in the aftermath of a recession, so consumer staples stocks…underperform discretionary stocks.”. Why is so? I though cyclical stocks took more hit in recession than non-cyclicals? Also in Q4, we’re shorting a cyclical bonds (also because it’s spread is tighter, but again tighter is a very subjective description). So I’m quite confused now.
Thanks as always!
The cyclical v. non-cyclical thing makes sense. In the amftermath of a recession (i.e. the worst is over/we are coming out of a recession) the economy starts picking up, people start spending more, consumer confidence picks up, etc. Just think about the stages of the business cycle and I think this will make sense.
I am with you on this one. Technically they are right on the spread thing. Bond 2 had a Baa1 credit rating which is right between Baa2 and A3 which is the ratings for the other 2. Therefore the spread should be smack dab in the middle using linear interpolation ~ 232 bps. The spread was 220 therefore the spread was a bit tight. You would short bonds like this because you would expect the spread to widen to the appropriate level. It was a bit subjective I can agree on that but technically it is correct.
Recession aftermath = just after the recession has ended
Cyclical stocks are more volatily than non-cyclical stocks (price volatility)
If recession has ended, expansion is coming, so cyclical stocks will increase in price faster than non-cyclical stocks, hence outperforming the non-cyclical ones.
Hope this helps!
What about value stocks vs growth stocks.in the aftermath of recession why do value stocks outperform growth stocks?i thought after recession has ended and economy is taking pace wouldnt growth stocks outperform?
Thanks bfry on the answers for the spreads, it makes sense, I buy it. But on the note of cyclical v.s. non-cyclical, why in Q6 we want to stay with consumer discretionary (cyclical) why for Q4 we are shorting consumer discretionary? Surely it’s also because of spreads in Q4 but they also mentioned consumer discretionary is highly cyclical etc…
If we understand aftermath of recession as if it’s right after recession, econ. is going to expand, then I also have the same question as Abeshak - why are growth stocks not out performing value stocks per Q6’s correct answer?
We have already discussed it earlier. Try to search 3-4 pages behind.
The answer for value stock picking in the aftermath of recession is because you seek to catch momentum and this is one small gap in time between recession and full recovery when value stocks may significant outperform growth stocks.
Economy will never exit from recession prompt, there are always several phases with main trends and sub trends in stocks prices. Technical traders know this very well (BTW, I am not one of them). 