Time to Rotate from Defensives to Cyclicals
As difficult as this may be to believe, we have had a defensive, ?RISK OFF? stock market for most of 2016.
It is even more incredulous, given that we tickled new all time highs for the major stock indexes only a couple of days ago.
However, after reviewing hundreds of charts, it is increasingly becoming clear that we may be seeing a sea change in sector preferences by investment advisors and money managers.
Get this one right and you will dominate the performance league tables and get more than a subscription to the ?Jelly of the Month? club from your clients at Christmas.
Miss it, and you will soon find yourself washing windshields at the nearest intersection, competing with the homeless.
To paraphrase ?Game of Thrones?, ?Winter is Going.?
It looks like the parting of the ways started in July when I was lost somewhere on the Italian railway system.
After being shunned all year, cyclicals have suddenly become the flavor of the day.
These would include major old line industrial companies like General Electric (GE) (2.94% yield), US Steel (X), (0.77% yield), and Caterpillar (CAT) (3.69% yield).
They also include financials (BAC) (1.98% yield), which have been beaten like a red headed stepchild because of the deleterious effect falling interest rates have on their P&L?s.
There are many possible reasons for the switch.
The defensive sectors that have led the market all year, like telecoms, utilities, and REIT?s, have been pursued in a relentless reach for yield. The driver here was a global collapse in interest rates across the yield curve.
A 1.33% yield on the ten-year Treasury (TLT), the low seen so far this year, covers a multitude of sins.
On this bandwagon were shares like AT&T (T) (4.47% yield), Duke Energy (DUK) (4.04% yield), and Simon Growth Properties (SPG) (3.00% yield).
The logic employed by many fund managers is to simply sell your winners and rotate into the losers.
If you are early, just let the dividends pay you some cash flow. If you aren?t, just keep scaling into rising prices.
As these sectors have lagged the market for some time, the downside risk is limited. This is no small consideration for a market that is at a seven year, all time high.
There is a growing belief that the second half will generate stronger US economic growth than the first half.
Massive and expanding quantitative easing in Europe and Asia is working it's magic, and will reduce the drag these economies have had on ours at home. Britain?s ten-year gilts just plunged to a record low 0.52% yield today.
Finally, there is that damn election. The outcome is no longer an unknown. Clinton leads by up to 15 points in the national polls and 90:10 in the betting pools.
No candidate in history has made up such a deficit with less than three months until Election Day.
The only unknown here is whether the Democrats grab the House of Representatives in addition to the Senate. The House is so gerrymandered; it is impossible to make a definitive call.
Clinton needs a minimum of 57% of the vote to pull off the trifecta. With Trump digging himself into a deeper hole daily, she may pull it off.
The financial markets are cheering this outcome. This is why we ran up to new highs ahead of my own schedule.
It?s hard to believe, but it has happened.
