Investors by now have become accustomed to the fact that it has been the traditionally defensive sectors of the stock market that have been leading the charge to new record highs for the S&P 500 index, as opposed to the more cyclically growth sensitive sectors of the market. The health care, utilities, and consumer staples sectors represent three of the top four performing industry classification sectors of the market this year as of month-end November.
The sharp decline in 10-year Treasury-note yields over the course of 2014, from 3% at the start of the year to as low as 2% in October, has been very supportive of the defensive sectors of the stock market, such as utilities, all year long. Early last week, New York Federal Reserve President William Dudley reiterated his view that he expects the Federal Open Market Committee (FOMC) to begin raising interest rates around mid-year 2015. Should investors begin to conclude that the FOMC will very likely be normalizing interest rates in 2015, the defensive equity market sectors, which had previously been leading the bull market in stocks, could suddenly become next year’s serial under-performers.
If 2015 FOMC policy adjustments play out as foreshadowed, the Global Markets Intelligence Research unit at S&P Capital IQ wonders what sectors would most likely replace the traditionally defensive categories as they relinquish their position of equity market leadership? We will be on the lookout for signs that the more business-cycle sensitive financial, technology, industrial, materials, and consumer discretionary sectors are about to assume the reigns of stock market leadership in this aging bull market.
And should the commencement of the first Fed tightening cycle witnessed in over a decade turn out to be a catalyst for another stock market swoon as seen in October, or perhaps even a more substantial market correction. Investors may want to focus on the economically sensitive pro-cyclical sectors when considering a prospective buy-the-dip opportunity, presuming U.S. recession risks remain nearly as low as they appear to be today.