Two recent articles support our sector views given that the Federal Reserve is likely to raise rates later this month:
In Schwab Sector Views: Sector Impact of a Fed Hike, Brad Sorenson of Charles Schwab presents research on how sectors typically perform over the first six and twelve months after the Fed begins to raise rates. Although he has a number of ways of breaking down the historical results, it is clear that technology and financial stocks tend to perform well when the Fed is tightening. We agree that these sectors are currently attractive given that we are in the mid-to-late stage of the recovery. Both households and businesses are now confident enough of their balance sheets and income results to borrow money to update and upgrade their technology. This should bode well for the financial and technology sectors.
In Buying Value Stocks Has Been a Losing Strategy, Ben Levisohn of Barron’s reviews the differing definitions of value stocks and the disparate results they have obtained this year. Although value stocks, tagged as such by a low price-to-book ratio (Morningstar’s definition), have underperformed by 15 percentage points this year, the securities with the lowest price-to-earnings ratios have outperformed by over 13 percentage points this year. Therefore, it has been fine to own value stocks this year as long as there has been earnings growth. Although Financials are usually defined as a value sector, we expect the sector to shine next years due to its accelerating earnings path and growing dividend payments. Also, we expect high and growing dividend paying securities will earn excellent results in 2016.
iSectors Implementation: The quantitative models behind the iSectors® Post-MPT Allocations have signaled agreement with these views. Financials is the number one equity holding in both Post-MPT Growth and Moderate strategies. Since Post-MPT Growth has a higher risk profile, it also has a heavy technology weighting. iSectors Domestic Equity, iSectors Global Equity and the equity portion of the Global Allocations have a strategic tilt towards dividend stocks as replacements for value holdings. All of these Allocations are positioned for the volatile market we foresee in 2016.