This Decline Has Been By The Book

Things in the capital markets seem to be a tad askew.

Taken as a microcosm, this recent decline seems to be very textbook when looked at sector by sector or theme by theme.

However serious this whole thing will will turn out to be, the financial sector gets a lot of the blame and it got hit much harder than the market.

Staples did better, foreign (as measured by EFA) did better, gold and forex did better, utilities and telecom did a little better (but not that great) and healthcare did better.

Materials did a little better depending on where you look, energy got crushed, emerging lagged noticeably.

That there is a textbook element here could be construed as comforting. I have been writing about certain stances I have taken in client accounts because I expected certain things to happen. All of the strategies I have written about are chapter one things and easily doable by anyone who goes narrower than SPY and EFA or growth/value.

For months we saw a parade of investment managers come on the tee-v favoring financials. All throughout that time I expressed concern about the slope of the yield curve as an obvious signal to lighten up. The arguments favoring financials were all plausible - but wrong. Ideas like underweight financials, overweight staples and overweight health have worked. The benefit of less financial exposure is obvious and while health and staples have not really outperformed, they have had a smoother ride - which is where I want to be late in the cycle.

This post is not a brag about being smart - it is a brag about owning the textbook. There is no original thought described here. The concept is more common sense than anything else. Common sense can apply to the other sectors too, and does not require too much keen insight. I made these types of moves ahead of time (and wrote about it) and will do the same thing as the next cycle ends.

Trust me, on the next yield curve inversion, smart people will come on the tee-v favoring financials and will again be wrong.

How much time, effort and potential decline do you spare yourself realizing now is a bad time for such and such a sector? Then you can get to the tougher stuff like country analysis, stock selection and the like.

Comments

[User 123358]

Is he saying the inverted yield curve is bad for financials?

[Roger Nusbaum]

y