Hedge funds buy the dip in cyclical funds

by Natalia Kniazhevich

Hedge funds have started to snap up the shares of economically sensitive companies that had cratered over the past month as recession worries rocked US stock markets.

Last week, they bought shares of banks, energy producers and other companies whose fortunes are closely tied to the economic cycle at the fastest pace since December, data from Goldman Sachs Group’s prime brokerage shows. Those stocks had been among the hardest hit, with one key index plunging nearly 10% from its recent highs, as President Donald Trump’s start-stop tariff threats sparked concern US growth would fizzle out.

This year’s weakness in cyclical stocks “was seen by some as an opportunity to buy the dip and re-enter at a better price,” said Jonathan Caplis, chief executive officer of PivotalPath. “On top of that, fund managers see sectors like US financials and traditional US energy as not as impacted by tariffs.”

Some cyclical sectors have been rebounding. The KBW Bank Index gained for eight straight sessions, its longest such streak since 2016, before falling on Wednesday as fresh tariff fears gripped markets. A Citigroup gauge that tracks how cyclical stocks perform versus defensive sectors such as utilities, health care and consumer staples has recovered around half of the losses it notched since last month’s peak.

Further gains in cyclical stocks could signal that some corners of the market are growing optimistic that the economic damage from tariffs may be less severe than feared. 

Some market-watchers are keeping an eye on the performance of cyclicals in relation to defensive stocks, which are popular hideouts for investors who are nervous about the economy. Bank of America’s Jill Carey Hall wrote that the firm’s clients were bigger net buyers of cyclical sectors than defensive sectors in aggregate last week, suggesting they haven’t been positioning for a recession. 

CONTRARIAN VIEW

Of course, that may well be a contrarian view. Plenty of market participants believe that tariffs could precipitate a US economic downturn that has not been fully priced by markets, despite a selloff that has dragged the S&P 500 down some 7% from last month’s record high. 

Stuart Kaiser, Citigroup’s head of US equity trading strategy, said at least part of the rebound in cyclical stocks may have been spurred by expectations that the Trump administration’s tariff policy may be more narrowly targeted than feared. 

“We see the rally in cyclicals as more tactical given ongoing concerns about US economic growth,” he said. “Spending data this week and jobs data next week will be a big test for both.” 

Copyright Bloomberg News