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Let’s start with Takeaway #1: Positioning Trades Within US Equities Have Been Mixed During Yield Curve Inversions, With A Bias Towards Defensive Groups As Recession Fears Mount
• We were on the road last week. Before Wednesday’s FOMC decision, the investors we spoke with were already focused on the yield curve, and pondering the question of how to be positioned during inversions. This has historically been a tricky issue for equity investors. Brief inversions have seen the S&P 500 rise more often than not. In extended inversions the S&P 500’s track record has been mixed.
• What’s clear when we look at industry groups, however, is that recession fears dominate and drive positioning trades. While leaders and laggards during these periods aren’t highly consistent, areas with a tilt towards outperformance tend to be defensive and include Commercial & Professional Services, Food & Staples Retail, HH & Personal Products, Materials, Pharma/Bio/Life Sciences, Software & Services, Telecom, Transports & Utilities. Areas that show the greatest tendency to underperform include Consumer Services, Energy, and Tech Hardware & Equipment. While much of this is obvious, it helps explain the sharp drop in Energy stocks at the end of the week.
Rates & Inflation Back to the:
Q P/E back to the:
orking on that forecasts a YE:
ke that which was seen in the:
inflation and P/E’s in the:
Wrapping up with Takeaway #3: The 3,500 Level on the S&P 500 Will Be Key To Watch In the Weeks Ahead
• With investor sentiment (both retail and institutions) at the low end of its historical range, and in the case of retail at GFC lows,
mic (and approaching December:
• …and stocks already baking in a big spike in jobless claims, we think stocks are on the cusp of an important test.
• While the June lows now seem unlikely to hold, if the S&P 500 experiences its typical recession drawdown of 27%, the index will fall to 3,501.
e to its long-term average on:
• Assuming our $212 estimate is in the right neighborhood (bottom-up consensus is still $242), it will break below average if the index hits 3,561. That may open the door for bargain hunters, though fundamental catalysts for a move higher – other than the midterms – admittedly are hard to identify.
That’s all for now. Thanks for listening. And be sure to check out our sister podcast, RBC’s Industries in Motion, for specific thoughts on sectors from RBC’s team of industry analysts.