Sector Rotation Amidst Coronavirus’ Economic Downturn

This article was written by Hugh Camiener, Analyst at I Know First. Bachelor of Arts candidate at Columbia University.


  • Coronavirus has ended the largest bull market in US History, stemming from a stagnation of economic activity.
  • Q1 of 2020 was the worst quarter for the Dow Jones since 1987.
  • Coronavirus has caused sector rotation into tech, and this may hurt the real estate sector in the long term.
  • Investors are also considering “undervalued” sectors such as airlines.
  • Artificial Intelligence can help investors determine when to rotate sectors and help maximize profits.

Coronavirus: The Black Swan

Coronavirus, a black swan, ended the largest bull market in history, resulting in the Dow Jones worst quarter since 1987. Unlike past crashes, this black swan was the resultant of a global stagnation of economic activity. Due to the pandemic, safety surrounding workers’ health caused many companies to temporarily shut down. Many people have become unemployed and are on a tighter budget. Though almost every sector initially declined, Real Estate, Travel, Industrials, and Materials took the brunt of the economic downturn. However, some sectors such as delivery cargo firms, online shopping platforms, and sanitary products manufacturing have been experiencing unprecedented demand.The stock market has rebounded significantly from the crash, but will coronavirus influence sector rotation?

What is Sector Rotation?

 In different stages of the business cycle, certain sectors tend to perform better than others. For one to capitalize on potential returns, it is imperative to understand sector rotation. Sector rotation refers to movement of investment assets from one sector of the economy to another. Usually this entails using the proceeds from the sale of securities in order to finance an investment in another sector. By utilizing sector rotation, it allows investors to capture returns from market cycles and diversify holdings over time.

Sector Rotation Analysis [ChartSchool]

Which Sectors Were Expected to be Profitable Before The Crash?


Above is a depiction of the S&P 500’s sector weighting in the beginning of 2020. Around 50% of the S&P 500 is in technology, health care, and financials. 

source: S&P Global

The value of sectors comes from companies who are ultimately profitable and are going to be profitable within the decades to come. In 2019-2020, analysts expected major growth in energy and health care. With a desire to switch to renewable energy amidst the effects of climate change, the renewable energy sector looked like a good investment. This mimics a typical sector rotation strategy, valuing the energy sector in a thriving market. However, coronavirus could significantly impact the evaluation of certain sectors, and where people choose to put their money. 

Sector Expectations in the “Post-Covid” World

Source: S&P Global

Like most sectors, the energy sector dropped significantly due to the economic shutdown. The energy sector includes exploring, drilling, mining, refining, and storing oil, natural gas, and coal. Over a one year period, the energy sector has decreased by 41.07%. With social distancing protocols and fears of coronavirus, people have not been traveling as much for work, vacation, or even to the grocery store. This newfound expectation, of not going out as much, has clearly affected a plethora of different sectors, not just energy. There have been huge shifts in future profitability of different sectors. Last year, during a bull market, the energy sector had optimistic expectations. But now, there is high volatility, due to uncertainty surrounding the supply/demand of oil. For now, technology services, like e-commerce, are valued highly based on their current necessity amidst irregular times.

Coronavirus Could Impact The Future of How We Live and Invest 

In the short-term, consumer goods companies will need to adapt to rapidly changing conditions and structure. A CDC study shows in major cities, 50% of people did not leave their homes at all during quarantine. For consumer goods companies, this leaves an absurd market for e-commerce. U.S e-commerce has increased 49% since April. Online grocery delivery has jumped 110% between March and April. The data indicates consumers are willing to spend on products which will help them manage the pandemic. In addition home delivery, buying online and picking up in store (BOPIS) has gained popularity. While BOPIS was originally a pre-pandemic niche, it is becoming the method of choice by many consumers. As consumers become more accustomed to the convenience and experience of BOPIS, it could become typical. Aspects of this “corona world” could easily manifest itself into our new way of life, and investors are betting on it.

Sector Rotation Amidst Coronavirus: Tech  

While initial panic led to the decline of most sectors, the technology sector has been bullish since. This could be a shift to the new status-quo of a digitalized age. Institutions and people will integrate parts of the new, as we attempt to return to earlier trends. For example, businesses might increase the amount of remote workers they have. In addition, people may continue to rely on e-commerce more than previously. Clearly, the tech sector has benefited from optimism regarding their place in the post-covid world. More people who use these technologies will find convenience in doing so and implement it into their lifestyle. Companies such as Zoom, Amazon, Apple, and Wayfair may excel in the post-covid world due to a newfound exposure and convenience of their technologies.

image from S&P global

New Tech Might Affect Real Estate

The Real Estate sector has been hit hard due to the coronavirus. With social distancing protocols, hotels, casinos, restaurants, malls, and sport centers have seen little economic activity. As peoples’ behaviors have changed due to the coronavirus, many are skeptical to go to crowded venues. New technology and exposure in online gambling, food delivery, and e-commerce could impact the future of real estate. In the short term, until people feel comfortable going to crowded spaces, they will rely on new tech. However, in the long-term, new technology could become integrated in our society, limiting the real estate sector in the future.

Airline Sector Rotation

Amidst downturn, after reaching newfound lows, airlines and cruises have actually been bullish. Airlines nosedived amidst the covid crisis, decreasing the value of most major airlines by 50% at least. Warren Buffet decided to jump the gun and get out of the airline industry, most notably with Delta. Buffet originally saw the airlines as a stable investment, where plane occupancy could fall 50%-60% during a recession. However, with fears of 95% vacancy, and huge overhead costs for airlines, Buffet did not want to be involved with future debt ridden companies. Buffet said, “[he] liked those airlines but the world has changed… and I don’t know how it’s changed.” On the flip side, other investors believe that the airlines are undervalued. Investors anticipate that people will one day be flying again, and they anticipate that the government will prop the major airlines up if needed. Airlines are extremely volatile right now, but they could still be  a high-reward long term option.

Using Artificial Intelligence to Capitalize on Sector Rotation

In a sea of data and statistics, artificial intelligence can give investors a competitive advantage. AI technology is ramping up around the world and has increased 44% from 2018 to 2019 alone. AI can process large amounts of information and data, giving investors better indications of where to invest and when to rotate sectors. While it can be difficult to identify the right time to rotate sectors, I Know First’s self-learning algorithm can rank and generate market predictions for over 10,500 assets. This information can give investors a competitive edge and understanding of when to change sectors. From 2017-2019, I Know First’s Sector ETFs predictions resulted in portfolios that have returned 25%. In these chaotic times, and an extremely volatile market, AI can help investors determine investment strategies in both the short and long term.


When evaluating the economic cycle, the technology sector is often the first to increase in the anticipation at the “bottom” of the economy. I believe that resembles what is going on currently in the market, as new technologies are being adopted. This may impact both the real estate sector and the future of how we live/work.  Amidst the economic cycle, health sectors are not typically the best sectors within a collapse. However, in this pandemic, the health sector has maintained many of its non-cyclical properties amid the decline in economic activity. Though there are potential “winners” in biotech and pharma for a covid cure, this only benefits the company itself and not the sector and is extremely unpredictable. In addition, airline stocks have also begun to experience sector rotation. Hitting troughs, there is a large opportunity for airline companies to bounce back in the long-term. Sector rotation has played a major impact in the current market, and artificial intelligence should be utilized by all investors going forward to help capitalize on returns.

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Please note-for trading decisions use the most recent forecast.