Although the second leg up of a cyclical bull market tends to offer less upside than the initial move higher, it also usually benefits more from the price to equity expansion in a cycle as job growth continues, consumers' incomes rise, general confidence lifts and consumer spending broadens.
-Stuart T. Freeman, chief equity strategist, and Scott L. Wren, senior equity strategist, Wells Fargo Advisors
This week, we have taken an updated look at one of our indicators that follows the movement of earlier cycle versus late cycle market performers. In the accompanying graph, we have plotted the indicator (in blue) and periods of economic recession (in red). What we note is that the last few cyclical bull markets have been comprised of several (or two material) legs of upward performance. The first begins during a recession and is followed by a period of mid-cycle doldrums and defensive market behavior that can last from 12-24 months.
However, the second period of upward general market movement tends to come after a mid-cycle period and tends to be driven by relatively more cyclically-oriented issues, once again. The mid-cycle period of sideways volatility is something we have discussed often; we expected it would include most of 2011.