OTW #39: Sector performance over the business cycle, Watch credit spreads, and more
Important financial stories to check out over the weekend
Hi Antagonist readers,
It’s time for another issue of “Over the Weekend.”
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1. Top-performing sectors across the business cycle.
In our September deep-dive issue, I suggested several ways you can diversify your portfolio beyond equities. I also explained how to use trailing stops to determine when it’s time to sell.
To be clear, this doesn’t mean that it’s time to liquidate your stock positions. You may, however, want to rotate into different sectors.
This graphic from Visual Capitalist shows how S&P 500 sectors have performed over each stage of the business cycle.
Antagonist’s take
Thanks to research like this, it’s easy to determine which sectors perform the best in each stage. The hard part, however, is figuring out exactly which stage we’re in.
Economic data can lag considerably—so much so that we can be in a recession for months before the “official” reports finally catch up.
Still, knowing how sectors perform across the business cycle is valuable knowledge. It can help you determine which sectors to overweight and which to offload.
2. Watch credit spreads.
Simon White, a macro strategist at Bloomberg and co-founder of Variant Perception, was a guest on last week’s episode of Macro Voices. He provided several excellent charts, but this one particularly stood out to me:
Even though bankruptcy filings have risen sharply, credit spreads have remained subdued.
According to White, “Low implied equity volatility is helping keep credit spreads repressed, compounded by the now huge $1.5 trillion private credit market distorting price discovery.”
In other words, credit spreads are disconnected from the actual economy.
Antagonist’s take
While credit spreads are still in “normal” range, they are creeping up. From Sept. 20th to the 28th, they rose 32 basis points. That was an increase of 8.5% in just 8 days!
I’ll be watching this trend closely. If spreads continue to widen, that’ll be our signal to buy high yield (a.k.a. junk) bonds.
To learn more about why credit spreads are important and how to profit from them, check out this article I wrote earlier this year.
3. Why don’t investors believe the Fed?
Minneapolis Federal Reserve Bank President Neel Kashkari said on Monday that given the surprising resilience of the U.S. economy, the Fed probably needs to raise borrowing rates further and keep them high for some time to bring inflation back down to 2%.
(Source: Reuters)
Antagonist’s take
The prospect of rates staying higher for longer seemed to surprise investors. Stocks sold off after the news.
I’m surprised that investors are surprised, however.
Regardless of how you feel about the Federal Reserve, their messaging has been consistent. Chairman Jerome Powell has said for months that reducing inflation is his top priority. He won’t even consider cutting rates until prices fall.
Stock investors have been acting like he’s bluffing. But the Fed’s decision to hold rates for now, coupled with Kashkari’s comments, show this isn’t the case.
It didn’t take long for the internet to have some fun with this either. If you’re old enough to remember the sitcom Friends, this meme might make you chuckle.
Last thing...
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Thank you for reading, and have a great weekend!
Jason Milton
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