Wednesday’s FOMC meeting shook the bull’s confidence to the tune of a -2.95% drawdown on the S&P 500. This was the 2nd largest negative day for the Index this year. The FOMC guided for 3 rate cuts next year resulting in a target rate of 3.75-3.85%. This underwhelmed vs. expectations of at least 4 cuts next year. Rates moved higher on stronger economic data and the Commission’s more sanguine outlook on the US Economy.
Given our current positioning in Growth exposures like Technology, Discretionary and Comm. Services Sectors, we are at a threshold where tactical re-allocation is on the table. Sellers are attempting to push the 10yr Yield through the 4.50% level. The chart below illustrates that despite some overbought conditions, the MACD study is signaling a continued move higher, and the playbook for higher rates in this cycle has been to move from Growth to Value.
Sector Performance Remains in a Bull Market Posture
While the FOMC did manage a brush-back pitch yesterday, the figurative high heat hasn’t derailed MTD performance trends yet. As equity investors we need to see the signal from the equity market itself in conjunction with the bond market. We remain vigilant, but we aren’t pressing buttons yet. We do wonder if some “bond market vigilantism” is on the docket. Inflation stats have cooled, but there is no doubt prices have risen materially over the past 5 years. Parking trillions 4% isn’t necessarily going to get it done.
The Sector performance table below shows correction hit the Discretionary Sector, which was overbought in the near-term and vulnerable to such a circumstance. Utilities are turning higher, but REITs are taking it on the chin. That might be another likely place to reduce exposure as lower rates are key to recovery there.
Data sourced from FactSet Research Systems Inc.
