Using the macro to trade sectors

While inexact at times, the study of macroeconomic cycles can be an invaluable part of the investing process. By understanding which part of the cycle we’re in, as well as the interplay between this information and market gyrations, investors can make more informed decisions on allocation and exposure. For instance, having an elevated level of risk exposure to defensive sectors like utilities and healthcare makes little sense when the economy has begun to expand after a recovery. As another example, demand for commodities (especially copper) will usually decline during periods of economic contraction.

At its most basic level, which investment professionals well understand, there are four phases of the economic cycle:

• The first is expansion – which is when an economy is growing as private sector demand remains strong. Households are spending money, and businesses are expanding operations to meet that demand.
• The second is the peak – when the economy is operating at, or above, potential. During this phase, employment is generally close to its full level while inflation is likely to rise.
• The third is contraction – which is when the economy slows down as households cut spending and businesses curb production. A particularly severe version of a contraction is called a recession.
• The final is the trough – which is the lowest point of the cycle. During this phase, the economy starts to recover as demand starts to improve from weak levels.

These phases are often influenced by several factors including: government-level policy making (both fiscal and monetary), the level of interest and exchange rates. All of which work to affect the supply/​demand balance for different markets. There are several different ways to calibrate where we are in the cycle, but in our experience, the most reliable predictor has been the OECD series of composite leading indicators (CLI).¹

Chart 1 shows the ​‘amplitude adjusted’ CLI for the aggregate G7 economies. This series is calibrated to focus on the shifts in the output gap (or the fluctuations of economic activity relative to long-term potential) to provide early warning signals for changes in the business cycle. There are two things to understand from the chart: first, that the upward trend in the series implies that we are in the expansionary phase of the cycle. Second, the time spent in this phase has been considerably long. 

Chart 1 – The OECD Amplitude Adjusted Composite Leading Indicator for G7 economies

In order to understand that second point, we turn to Table 1, which shows the past seven expansions and the length of time spent in them. The current expansion for G7 economies has lasted 32 months, which is the longest of all prior expansions and well above the average of 20.4 months. When we take that observation with the fact that i) monetary policy is moderately restrictive in the United States, and ii) trade barriers between the developed countries are much higher now relative to before, our sense is that developed market economies are now in the midst of a transition from ​‘expansion’ to ​‘peak’.

Table 1 – The past seven expansionary phases for G7 economies and length of time

Source: OECD, BMO Global Asset Management, as of June 2025.

During the ​‘peak’, investors should start to position their portfolios for a slowdown. What does that mean?

Chart 2 shows the correlation for sector ETFs in BMO Global Asset Management’s product suite against the OECD’s CLI for the G7 economies. These correlations go back ten years – which means they’ll capture a few of the business cycles which will help us contextualize how each of the ETFs move with them. Unsurprisingly, the strongest positive correlation is with ZMT – which is something we’d expect given the procyclical nature of base metals. But given our view that the macro backdrop is pivoting towards defensiveness, this would not be the product we’d look at.

Chart 2 – Correlation of sectors with OECD G7 CLI

Instead, we’d expect to see further upside with ETFs that are far less correlated to the CLI. That would mean ZGD, ZJG (gold miners) as well as ZGLD, ZHU and ZGI. Indeed, the diversification benefits of ​‘haven’ sectors and commodities will come in handy if the developed world begins to transition into a more challenging backdrop.

In the U.S., we perform the same analysis, but substitute the G7 CLI for the U.S. version. Chart 3 displays the results – which indicates that Staples, Utilities, Healthcare and Tech are the sectors best placed going forward.

Chart 3 – Correlation of U.S. sectors with OECD U.S. CLI

The new BMO SPDR Select Sector Index ETFs are efficient allocations for direct exposures to those areas, with ZXLP (Consumer Staples), ZXLU (Utilities), ZXLV (Healthcare) and ZXLK (Technology) serving as entry points. Additionally, each are also listed in hedged formats (.F).

Please contact your BMO institutional sales partner for additional market insights. For more market insights and commentary from BMO ETFs Strategist Bipan Rai, please visit and bookmark Basis Points.

¹Composite leading indicator (CLI), OECD.

Performance (%)

Bloomberg, as of June 30, 2025. Inception date for ZMT = October 20, 2009, ZGD = November 14, 2012, ZJG = January 19, 2010, ZGLD = March 4, 2024, ZHU = February 12, 2019, ZGI = January 19, 2010, ZXLP, ZXLU, ZXLV, ZXLK = February 3, 2025.