We run the Elev8 Portfolio to keep you up to date with actionable signals and changes in outlook. Following the Fed’s Wednesday decision to cut rates 50bps and the market’s positive reaction on Thursday, we are increasing historical upside exposures XLK and XLY at the expense of XLV, XLU, XLRE and XLC to our portfolio. We remain 0 weight in XLB, XLE and XLP.
The bullish change comes as the Fed. has switched policy focus to bolstering full employment. We note that while the 2yr treasury yield is lower today, the 10yr is higher. This gives us a first clue that dovish interest rate policy is likely to come against a backdrop of rising longer duration yields. This also represents a big component of thesis risk for us, and if we see rates down the curve moving lower rather than higher, we may be offsides.
That said, we have seen strength in Financials over the intermediate term and Consumer Discretionary stocks in the short term while low vol., high dividend sectors have reached material overbought conditions after rallying the last 3 months.
Our new positioning is as follows:
Our previous positioning:
We are now materially underweight to the lower vol. sectors at the portfolio level, and we continue to be underweight commodities adjacent exposures XLB and XLE preferring exposure to XLI. This is a playbook informed by previous QE regimes which led to sustained outperformance from Growth co.’s and well capitalized US companies with strong credit ratings. We also note the secular headwinds to various components of the fossil fuel industry.
We also want to be long the XLY when equities are in uptrends and the S&P 500 broke out to new all-time highs today confirming the longer-term bull trend is still in force.
Data sourced from Factset Data Systems
