Is it time for defensive stocks?

  • The recent economic strength in the U.S., particularly after the elections and driven by tax cuts and fiscal stimulus, has led to a strong out-performance of cyclical stocks versus defensive stocks (the above charts shows the relative performance of cyclicals vs defensives)
  • However, it has to be assumed that these economic measures will only provide a short-term boost to the U.S. economy and therefore the optimism about the growth outlook has to be evaluated critically
  • In this regard, an ongoing out-performance of the U.S. cyclical vs defensive sector seems fragile, especially compared to its historical level
  • Strategy: Based on this view it seems reasonable to start over-weighting defensive stocks versus cyclicals, and thus, to take profit on this relative out-performance of more than 20%
  • Nevertheless, a significant break and stabilization of the U.S. 10y yield above 3% could be a risk for this strategy