Earlier this evening, we received the following question from a very thoughtful [and successful] investor in response to our deep dive on Q4 2015 and full-year 2016 GDP:
"What are the sectors that outperform and underperform in quad three? Quad four?"
Given it's obvious relevance and our interest in continuing to broadly own the U.S. capital markets debate, we thought we'd share our response with a broader audience:
Thanks for reaching out; hope all is well, good sir.
In #Quad3, the sectors that have historically performed best are Utilities, REITS and Tech – in order from best to least best:
The sectors that have historically performed most poorly in #Quad3 are Materials, Financials and Consumer Discretionary – in order from worst to least worst:
In #Quad4, the sectors that have historically performed best are Healthcare, Consumer Staples and Consumer Discretionary – in order from best to least best:
The sectors that have historically performed most poorly in #Quad4 are Energy, Financials and Materials – in order from worst to least worst:
The table below details the breadth of our factor exposure backtest data according to the respective GIP model quadrant:
With 2016’s first month of PnL officially in the books, we are keen to highlight how domestic capital markets continue to perfectly price in ongoing #Quad3 stagflation.
Within the equity market specifically, Utilities, REITS and Tech are all outperforming the broader market by an equally weighted average of 424bps. Meanwhile, Materials, Financials and Consumer Discretionary are each underperforming the broader market by an equally weighted average of 327bps. The delta between our [only] preferred equity sector on the long side (i.e. Utilities) and our most preferred equity sector on the short side (i.e. Financials) is a whopping 1380bps. That is a ton of alpha without having to take on any market risk.
Within fixed income specifically, our call to aggressively high grade bond portfolios is paying off as well. Our favorite long idea in the space (i.e. 30Y Treasury Bonds) is outperforming our favorite short idea (i.e. High Yield Credit) by 1049bps YTD already. Muni Bonds are delivering solid absolute and relative performance as well.
All told, accurately forecasting directional trends in top-down growth and inflation readings continues to deliver a substantial degree of alpha for investors who are appropriately positioned for our forecasted quadrant outcomes. More importantly, we expect this #Quad3 divergence trade to continue for the next month or two. By mid-to-late March, however, the market may have begun to price in the economy’s inevitable shift back to #Quad4.
Will Healthcare and Consumer stocks be as defensive as they have historically been in #Quad4 during the next iteration (2Q16)? Per the hyperlinked research below, the fundamentals would suggest the answer to that question is a resounding “NO”. That said, however, the confluence of time and price will ultimately reveal the truth as it always does.
- Early Look: Reformaggedon Cometh! (11/20/15)
- 50 Charts On Why Consensus Macro Is Dead Wrong On the U.S. Consumer (1/19/16)
Hope this helps; let me know if I can expound upon or add anything. See you in a couple of weeks!"
Enjoy your respective weekends,