Over the last five Fed easing cycles consumer staples, healthcare and energy provide the highest average total return above the index one year after the Fed’s first cut. This is not too surprising given that the Fed started cutting as recessions loomed in 2007 and 2001, with defensive stocks losing less money than higher-beta stocks. Energy sector outperformance has been carried by the oil price shock in 1990.
It’s also useful to look at how each sector has performed until the Fed started hiking again (top-right chart) – utilities perform poorly while tech, consumer discretionary and financial companies are winners. We can attribute this outperformance to these companies’ high betas (to the S&P 500), so while they suffer in the initial slowdown, their higher price sensitivity drives performance through the recovery rally. As we’ve written before, we believe today’s closest parallel is to the 1995 insurance cut, notwithstanding the US and China unable to rein in trade hostilities. The market rallied in the following 12 months led by healthcare and staples. We observe in the last chart the cyclical/defensive ratio losing steam after the first cut in July 1995 but then reversing after the last cut with the Fed stating that inflation trends were stabilising. We expect the Fed to push rate cuts into 2020 and prolong slowdown expectations, which is why we currently favour defensive sectors and portfolio hedges in the US space.
(Click on image to enlarge)
Source: Bloomberg, Macrobond, Variant Perception