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Something Has Changed

Something has Changed:  The past six weeks has been instructive and shows signs that the US equity market may be setting up for a broader rally.  The S&P 500 is hitting new historic highs but on the back of a ‘defensive rally’.  What does that mean?

Equity markets are segmented into 11sectors, from Basic Materials and Utilities to Technologies and Health Care (see below for broader explanation*), Below is a chart of the S&P 500 (the US broad market equity index) one year sector performance as reflected in Sector SPDR ETF’s from September 20, 2019:


(Note: This is a great site to get a perspective on what’s moving the broader market:

http://www.sectorspdr.com/sectorspdr/tools/sector-tracker )

The two best performing sectors for a one year period ending September 20th were Real Estate (up over 18%) and Utilities (up over 20%), the two most ‘non-rock-star’ sectors in the Equity markets.  If Technology is the Ferrari, Utilities are the family people movers.  Equity purchasers have effectively been saying ‘if I need to buy something, I’m buying safety’.

But look at what’s happened in the last month:


Source: http://www.sectorspdr.com/sectorspdr/tools/sector-tracker

The chart above is a great illustration of what’s called ‘Sector Rotation’, or ‘selling the stuff that has gone up and buying the stuff that hasn’t’.  Red turned green and green turned red.

Financials, Technology, Health Care all performed well over the last month, Real Estate and Utilities did nothing.  

What happened?

The optics became clearer on a few market worries:

  • The Federal Reserve said ‘we’re still listening’ to the markets and delivered a third rate cut this year, which helps create a potential market tailwind.  Remember in December of 2018 the Fed was hiking rates and the S&P 500 responded with a downdraft of over 13%.  Current conditions point to that being unlikely this year.

  • The US Treasury yield curve ‘un-inverted’.  What does this mean?  From May of this year to mid October the US 10 year maturity Treasury Bond had a lower yield than the 3 month US Treasury Bill; this can be a precursor to a recession (and the Fed is well aware of this).  The rate cut last week has put the impetus on ‘reverting’.

  • US China trade negotiations show some signs of progress.  The fewer tweets the better.

  • A hard Brexit is effectively off the table.  Any existential political threat to the EU has dissipated. 

  • 4th quarter earnings have held up well, over 70% of companies have reported better than expected earnings.

  • The unemployment rate remained unchanged at 3.6%, the GM workers strike had raised concerns employment numbers could soften.  Over 158,500,000 people are reported employed in the US, that number has never been higher (source Bureau of Labor Statistics). 

“What does this matter to me?”

  • Review your portfolio exposure to Consumer Discretionary stocks (companies that sell stuff we want but don’t necessarily need).  With employment and income levels staying positive the potential exists for a blow-out Christmas season.

  • Take a look at Banks.  Banks make money by borrowing short-term and lending long-term, and the ‘reversion’ of the yield curve actually make this a profitable activity!  This has been a heartache recommendation for analysts for years (and one I’ve stayed away from).  The potential is there for a meaningful re-rating in the market.

  • Review your Bond allocation.  US Treasuries, ‘A’ rated corporate bonds, and Mortgage Backed Securities have had stonking rallies this year.   The case could be made that we are seeing a turning point in yields.  Maybe take a little off the table?

Thank you for reading.  I’m happy to help.

Brian Kearns, CPA

Haddam Road Advisors

Ph: 312 636 3067



* The Global Industry Classification System (or GICS) breaks down Global Equity Markets into 11 sectors.  A basic explanation is here: https://www.investopedia.com/terms/s/sector-breakdown.asp

A more involved explanation is here:


NOTE:  This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing.  One cannot invest directly in an index.  The views expressed are those of Haddam Road Advisors and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates.

Investment advisory services offered through Mutual Advisors, LLC DBA Haddam Road Advisors, a SEC registered investment adviser. 

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