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Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more about the Early Look.

2 ETF Picks: Is Your Portfolio Ready For The Best Environment For US Stocks? - sunrise

... So inflation is falling and U.S. economic growth is heating up, now let’s consider financial market history and which sectors perform best in this environment. In our model, growth and inflation are the most consequential metrics for predicting future financial market returns. So in this two-factor framework you get four possible outcomes. Each outcome is assigned a “quadrant” in our Growth, Inflation, Policy (GIP) model:

  • Growth Accelerating, Inflation Slowing (QUAD 1)
  • Growth Accelerating, Inflation Accelerating (QUAD 2)
  • Growth Slowing, Inflation Accelerating (QUAD 3)
  • Growth Slowing, Inflation Slowing (QUAD 4)

Our GIP model suggests that the U.S. economy is currently in Quad 1 for the second quarter of 2017 and should remain there through the first quarter of 2018.

Now, if you're looking to tilt your portfolio to Quad 1 asset classes, the top-performing S&P 500 sectors historically are Technology (XLK) and Consumer Discretionary (XLY). Over the past 20 years of quarterly observations, Consumer Discretionary and Tech have positive expected values of +4.4% and +4.0%, respectively, in Quad 1 (i.e. GROWTH ↑; INFLATION ↓). 

2 ETF Picks: Is Your Portfolio Ready For The Best Environment For US Stocks? - 6 15 17 Chart of the Day