The market, up until the past couple of weeks, has been driven almost entirely by mega-cap growth stocks. The tech sector had been the unquestioned market leader (the Nasdaq 100 is still up 27% year-to-date even after the past couple weeks), while consumer discretionary stocks have ridden the way of soaring retail sales.
But, surprisingly, none of those groups has been the market's top performing sector since the March 23rd bear market low. The three most popular sectors - technology, consumer discretionary and communication services - fueled by the market's biggest names - Amazon, Apple, Facebook, Alphabet and Microsoft - aren't sitting on top of the list.
The market leader so far is a cyclical sector.
It's obviously not the energy sector. While initially doubling in value in the 2 1/2 months following the March low, energy stocks have given back much of those gains as fuel demand looks to be slowing and crude oil prices begin heading back down.
It's not the financial services sector. It's been only a middling performer as interest rates remain at record low levels and probably will for some time. No steepening yield curve, no real chance at outperformance.
Industrials have done well as factory and manufacturing activity continue to come back online, but it's not the top performer either.
The winner is the materials sector.
The Materials Select Sector SPDR ETF (XLB) has gained more than 70% since the bear market low, beating out every other sector and outperforming the S&P 500 by 20%.
The big catalyst has likely been the red-hot housing market. Lumber prices have soared as record low rates have kept demand for both new and existing homes robust. Stimulus cash has fueled big gains in home improvement stocks, such as Home Depot (HD) and Lowe's (LOW), as consumers use the quarantine to catch up on home improvement projects.
Low rates will likely keep the housing market humming along, but industrial activity could be key to the next leg higher. Factory activity has been increasing, but it's still far from pre-COVID levels. If the global economic recovery stalls, materials and other cyclicals could quickly fall behind again.
But, for now at least, the materials sector is performing incredibly well.