We see several themes playing out this year for US domestic sectors, with regards to sector fundamentals, factor selection and the overall direction of the US economy. In our STAR mid-year update, we seek to answer following questions:
- How have the sector economic fundamentals evolved and how does that guide allocation?
- So far this year, why are sectors not performing in line with fundamentals?
- Why is value still underperforming growth & is the reversal expected to continue? Is this related to small caps underperforming large/mega caps?
- What are the implications of market uncertainty from Brexit, monetary policy, elections etc. for domestic equity?
The Stock Market appears to be placing value on the following sectors in particular; Energy, Materials, Utilities and Industrials – laggards from last year as well as ones projected to perform well in a risk off environment. However, given that we are fundamentally driven, our analysis believes that Economic indicators are pointing toward a weaker growth environment in these particular sectors compared to others such as healthcare, financials and technology.
Our view is that there is a disconnect between the fundamentals and sector performance, implying that the rally is being driven by expanding price multiples rather than economic outlook
Sectors ranked by Composite Valuation Indicators as of June 30, 2016. The ranking shows average of ranks for Estimated P/E 2016, Projected 5-year Earnings Growth, Price/Book and Long Term Debt/Capital. (Source: Bloomberg, Factset) Past performance is no guarantee of future results. See definitions and disclosures here for additional information
We believe that as political and economic uncertainty dissipates, the risk-off trades will unwind bringing market performance in line with fundamentals, which could help the following;
- Value converges in performance to historical patterns versus growth stocks
- Large caps give way to small and mid-cap leadership
- Defensive sectors flows subside & market corrects to reflect relative economic strength.
However, as long as the external headwinds remain, being able to pare down overall exposure to equities, in our opinion, reduces volatility and drawdowns in the long run.
Sector Economic Index used in STAR for July 2016 compared to July 2015 and July 2014. (Source: Astor Calculations) Past performance is no guarantee of future results. See definitions and disclosures here for additional information
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All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.
The Sector Tactical Asset Rotation Composite is a tactical strategy focused on the generation of returns through shifts in domestic equity sector allocations. The Composite exclusively uses exchange-traded funds (ETFs) and focuses on investing in domestic equities during economic expansions while reducing equity exposure for fixed income and cash in weak economic periods. Prior to May 2014, the Composite previously invested in various other asset classes, including commodities, international equity, and currencies. The Composite includes a minimum 15% domestic equity allocation and does not invest in inverse funds. The benchmark is the S&P 500 Index. The S&P 500 Index is an unmanaged composite of 500 large capitalization companies. S&P 500 is a registered trademark of McGraw-Hill, Inc.