Cyclicality versus secularity

Which of the current trends that can be observed in the stock market are "cyclical" and which are "secular"? The more I think about it the more I am convinced that the answer to this question is what will ultimately determine who are the winners and who are the losers in the current market environment.

Since the summer of 2007 there has been a remarkable rotation of value within the stock market (if value as defined by stock prices). Sectors perceived as being as being cyclical have sold off considerably, to the point that many are now already assuming a recession. This is true among retailers, consumer media, advertising, housebuilders etc., all of which are trading on trough multiples. Sure, if the actual macro situation turns out to be truly terrible then perhaps these sectors will sell off more. But we could easily have already had a recession, with the recovery and bounce soon to follow.

Meanwhile, other sectors, such as industrials, mining, commodities and emerging markets (to some extent) are back at all time highs. Why is this? The only explanation, as far as I can tell, is that the expectations are that these sectors are now is a secular up-cycle, immune to a downturn in the western economies. This seems to me a rather bullish belief and I would certainly not be overweight these sectors. Either the economy goes down further and these sectors suffer more than those that have already sold off (as expectations are revised downwards), or the economy recovers, and those cyclical sectors that have already sold off have a greater re-rating.

It is very strange in the current market how much of an obsession there seems to be with macro, and whether or not there will be severe US downturn. This might partly explain why those sectors perceived as structural solid growers have outperformed so much. Yet I find it odd how many fund managers I work with continue to look for "defensiveness", somehow convincing themselves that the market must not have already priced in all the macro data. If something is in the press every minute of every day, if all your colleagues are talking about it and fretting about it, then that should surely be a sign that it is time to move on and get ahead of the curve. I therefore believe that now is the time to be aggressive, not defensive. Don't get involved in the defensive/secular stories, but rather look for the beaten up cyclicals with the most upside in a recovery scenario. That's where the alpha is in today's market...